Delivering Sustainable Growth

Home , Cohiba (cigar brand), Montecristo (cigar), Reemtsma, Skruf Snus

Sales See overleaf for an overview of our business today. See page 12 for detailsour on strategy. growth

Cost optimisation focused Returns shareholder value. our long track record of creating sustainable We continue to build on Strong cash flow Targeted investment Our business model providescircle a of virtuous investment andgrowth sustainable and has consistentlystrong delivered returns to our shareholders. Imperial Tobacco is acompany leading which international manufactures, tobacco markets,and distributes sells a comprehensivetobaccos, range cigars, of rolling cigarettes, papers and tubes. VERING LI Imperial Tobacco Group PLC Annual Report and Accounts 2009 DE SUSTAINABLE GROWTH

Imperial Tobacco Group PLC Annual Report and Accounts 2009 Registered Office Imperial Tobacco Group PLC PO Box 244 Upton Road Bristol BS99 7UJ UK www.imperial-tobacco.com Sales See overleaf for an overview of our business today. See page 12 for detailsour on strategy. growth

Imperial Tobacco Group PLC Annual Report and Accounts 2009 Registered Office Imperial Tobacco Group PLC PO Box 244 Upton Road Bristol BS99 7UJ UK www.imperial-tobacco.com Business Overview

Our Total Tobacco Portfolio Performance Highlights Imperial Tobacco is a leading international tobacco company, which manufactures, markets, distributes and Adjusted Proﬁt Net Revenue1 from Operations1 sells a comprehensive range of cigarettes, tobaccos, cigars, CIGARETTES FINE CUT TOBACCO CIGARS PAPERS & TUBES rolling papers and tubes. United Kingdom £893m £601m See page 23

Germany £826m £403m See page 24

Spain £610m £275m Get more online by visiting: See page 25 www.imperial-tobacco.com 1 View the 2009 Annual Report online 21bn 2 Access the latest shareholder information cigarettes UK 24bn 3 View archive information cigarettes 59bn Our Balanced Germany cigarettes Rest of EU 4 Access shareholder services Rest of EU £1,490m £566m Geographic See page 26 5 Tell us what you think Footprint 174bn 30bn cigarettes cigarettes Spain Rest of World 14bn cigarettes Americas Americas £861m £288m See page 27

Rest of the World £2,138m £617m See page 28 Registered Office Imperial Tobacco Group PLC PO Box 244 Upton Road Adjusted Proﬁt Bristol BS99 7UJ Distribution Fees1 from Operations1 UK Logistics Registered in England and Logistics £964m £177m Wales No: 3236483 Our logistics business is one of the See page 32 Registrars largest in Europe. Its core business Equiniti is Tobacco Logistics as well as Aspect House providing other logistics services. Spencer Road See page 8 for more information on our Lancing 2009 results. 1 Management believes that these non-GAAP measures provide a useful comparison of business performance West Sussex BN99 6DA and reflect the way in which the business is controlled. Definitions are included in our accounting policies 0871 384 2037 within the notes to the financial statements. Reconciliations between adjusted and reported measures are +44 (0) 121 415 7009 also included in the relevant notes. Business Overview

Germany £826m £403m See page 24

Contents

Overview 3 Directors’ Report: Governance

2 Financial Highlights 34 Chairman’s Introduction 3 Chairman’s Statement 36 Board of Directors 38 Chief Executive’s Committee 1 Directors’ Report: Business Review 39 Corporate Governance Report Strategic and Financial Review 50 Directors’ Report: Other Information 55 Directors’ Remuneration Report 6 Chief Executive’s Review 8 Financial Review 4 Financial Statements 12 Strategic Review 14 Key Performance Indicators 73 Independent Auditors’ Report to the 16 Principal Risks and Uncertainties Members of Imperial Tobacco Group PLC 18 Case Study: Total Tobacco Focus 74 Consolidated Income Statement 20 Corporate Responsibility 75 Consolidated Balance Sheet 76 Consolidated Statement of Recognised Income and Expense 2 Directors’ Report: Business Review 76 Consolidated Cash Flow Statement Operating Review 77 Accounting Policies 83 Critical Accounting Estimates and Judgements 22 Our Diverse International Footprint 85 Notes to the Financial Statements 23 United Kingdom 127 Independent Auditors’ Report to the 24 Germany Members of Imperial Tobacco Group PLC 25 Spain 128 Imperial Tobacco Group PLC Balance Sheet 26 Rest of EU 129 Notes to the Imperial Tobacco Group PLC 27 Americas Balance Sheet 28 Rest of the World 29 Case Study: Morocco Supplementary Information 31 Manufacturing 32 Logistics 131 Principal Subsidiaries 133 Shareholder Information 135 Index 136 Glossary

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OVERVIEW Financial Highlights

Volumes 20091 Change 20081 Cigarettes2 322.2bn +10% 294.1

Financial Highlights – adjusted basis3 2009 Change 2008 Adjusted profit from operations £2,933m +32% 2,230 Adjusted profit before tax £2,233m +39% 1,607 Adjusted earnings per share 161.8p +18% 136.9

Financial Highlights – unadjusted basis 2009 Change 2008 Revenue £26,517m +29% 20,528 Profit from operations £2,337m +59% 1,471 Profit before tax £945m +52% 621 Basic earnings per share 65.5p +29% 50.6 Diluted earnings per share 65.3p +30% 50.4 Dividend per share 73.0p +16% 63.1

1 Results for 2009 include a full 12 months’ contribution from Altadis, whereas 2008 comparatives include the Altadis contribution since completion of the acquisition on 25 January 2008. 2 Our 2008 cigarette volumes have been restated to include third party manufacturing and distribution arrangements in certain countries. 3 Management believes that these non-GAAP measures provide a useful comparison of business performance and reflect the way in which the business is controlled. Definitions are included in our accounting policies within the notes to the financial statements. Reconciliations between adjusted and reported measures are also included in the relevant notes.

The Annual Report contains certain forward-looking statements with respect to the operations, performance and financial condition of the Company and the Group as a whole. By their nature, these statements involve uncertainties since future events and circumstances can cause actual results to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report should be construed as a profit forecast.

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OVERVIEW Chairman’s Statement

A YEAR OF CONSIDERABLE ACHIEVEMENT

Iain Napier Chairman Our focus on sales growth, optimising our cost base and efficiently utilising the cash we generate, has enabled us to drive growth and deliver volume and market share gains in many markets across our regions. Whilst tobacco is not immune from the current difficulties affecting the global “We have delivered another strong operational economy, we have a successful strategy and financial performance, further building on and a resilient business. our excellent track record of creating sustainable Earnings and Dividends Our adjusted profit from operations shareholder value.” increased by 32 per cent to £2.9 billion, while reported profit from operations grew by 59 per cent to £2.3 billion. Our performance reflects a full year’s contribution from Altadis compared with eight months in 2008, good organic growth, synergy benefits and currency translation gains.

TOTAL SHAREHOLDER RETURN

Over the past ten years 700 we have outperformed the FTSE All-Share 600 Index by 286%. 500 With dividends 400 reinvested, £100 300 invested in Imperial Imperial Tobacco Tobacco ten years ago 200 would now be worth 100 £517 compared to just £134 invested in the 0 FTSE All-Share FTSE All-Share Index. 99 00 01 02 03 04 05 06 07 08 09

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OVERVIEW Chairman’s Statement continued

Corporate Governance

Our commitment to high standards of conduct and performance is highlighted in our new and expanded Corporate Governance Report.

See pages 33 to 54 for more information.

Our adjusted earnings per share have Middle East. We also continued to the world’s leading international tobacco risen by 18 per cent to 161.8 pence. Basic strengthen our position in mature markets, companies. He has made an outstanding earnings per share were 65.5 pence (2008: with good financial results in the UK, contribution to our success and on behalf 50.6 pence). The Board recommends a Germany, Spain and France. of the Board and our employees I would like final dividend of 52.0 pence per share, to express our gratitude for his tremendous We took steps to improve the competitive bringing the total dividend for the year to commitment, drive and dedication. position of our world leading cigar business 73.0 pence per share1 (2008: 63.1 pence, through cost optimisation and portfolio I am delighted that Alison will succeed adjusted for the bonus element of the rationalisation initiatives. Gareth. She has an exemplary track record rights issue in June 2008). This represents in our business and has played a key role growth of 16 per cent. Strengthening our balance sheet is a in driving our international expansion. Alison priority and we made excellent progress Altadis Synergy Delivery has held a number of senior positions during the year. Strong cash generation We have made considerable progress with in the business as part of her ongoing has been a consistent hallmark of Imperial the integration of Altadis during the year. development and was appointed Chief Tobacco. We have delivered a cash We delivered €147 million synergies in our Operating Officer in March. Her leadership conversion rate of 128 per cent reflecting current financial year, bringing the total to capabilities and strategic vision will ensure £1 billion in working capital improvements. €190 million to date, €10 million ahead of that Imperial Tobacco continues to evolve As a result we have reduced our adjusted our target. We remain very confident of and maximise growth opportunities. net debt by over £2 billion, excluding the achieving our previously announced target impact of foreign exchange movements. In September, Bruno Bich resigned as of €400 million cumulative synergies by We also raised £3.9 billion in the year a consequence of his overall business the end of our 2012 financial year and our through bond issues such that we now commitments. I would like to thank him net revenue synergy target of €60 million have no refinancing requirements until 2012. for his contribution to the Company since by 2011. his appointment to the Board last year Corporate Governance Operational Performance and wish him well for the future. Our stakeholders rightly expect us to act These results again demonstrate the in a fair and responsible manner and our Finally, my thanks to our employees strength of our versatile brand and product commitment to high standards of conduct who have worked hard to drive the portfolio and wider geographic reach. and performance is as strong as ever. performance of the business in a Our powerful portfolio spans all tobacco challenging operating environment. Our Corporate Governance and internal product categories and price points and control procedures include appropriate Our focus on sales growth, underpinned enables us to quickly align with local policies and procedures in place to meet by our diligent approach to cost and cash market consumer preferences. the high standards expected of us. management, enables us to look to the Our particular strength in value cigarettes future with confidence and leaves us Board Changes and our world leadership in fine cut well positioned to continue to create In November we announced that Gareth tobacco has enabled us to capitalise on sustainable value for our shareholders. Davis, Chief Executive Officer, will retire consumer downtrading and is an advantage in May 2010 and will be succeeded by in the current economic climate. Alison Cooper, currently Chief Operating We have focused on building sales of our Officer. Gareth and Alison will continue to international premium and mainstream work closely together to ensure an orderly cigarette brands, Davidoff and handover during the next six months. Iain Napier Gauloises Blondes. Chairman Gareth was appointed Chief Executive We have made great advances in a Officer in 1996 and under his leadership number of emerging markets including Imperial Tobacco has developed from a Asia, Eastern Europe, Africa and the predominantly UK business into one of

1 If approved by shareholders, this dividend will be paid on 19 February 2010 to those shareholders on the register on 22 January 2010.

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02 1 STRATEGIC & FINANCIAL REVIEW

In this section: 6 Chief Executive’s Review 8 Financial Review 12 Strategic Review 14 Key Performance Indicators 16 Principal Risks and Uncertainties 18 Case Study: A Total Tobacco Focus 20 Corporate Responsibility

Our Total Tobacco Portfolio: 01 JPS Pink is a variant of our value brand JPS. 02 Drum underpins our world leadership in fine cut tobacco. 03 Fortuna is a market leading cigarette brand in Spain.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Chief Executive’s Review

LEVERAGING OUR STRENGTHS

Gareth Davis Chief Executive

“On an organic basis, we delivered growth of 5 per cent in tobacco net revenue and 7 per cent in adjusted profit from operations in the second half of the year, offering a true comparison post the Altadis acquisition.”

Performance Overview In the premium segment, we grew During another successful year for Imperial Davidoff by 12 per cent with particularly Tobacco we have grown profits in our strong growth in our Rest of the World mature markets and made great advances region. Within the mainstream segment, in emerging markets with volume, profit Gauloises Blondes was up by 1 per cent and market share gains. and JPS, a key brand in our value We increased our overall cigarette volumes portfolio, grew volumes by 11 per cent by 10 per cent to 322 billion, including a full with growth in all regions in which it is year contribution from Altadis and many sold. This was complemented by excellent good brand and market performances. results from a number of our regional and local brands. Our focus on building sales has delivered 5 per cent organic growth in tobacco net We continue to leverage our strength in revenues and 7 per cent organic growth in value cigarettes and fine cut tobacco to adjusted profit from operations, at constant respond to ongoing consumer downtrading. currency and before synergy benefits in the We have also grown our fine cut tobacco second half of the year, the first reporting volumes in the UK, Spain, Germany and period to offer a true comparison post the Central Europe. Altadis acquisition. We are world leaders in cigars and in Our total tobacco portfolio ensures we spite of challenging trading conditions, can be flexible and agile in responding to we have further improved profitability and changing consumer and market dynamics. strengthened our competitive position. Understanding the evolving nature of Our tobacco logistics business performed consumers and aligning our local market robustly including a particularly good portfolios to match their preferences is performance in France. Whilst our other an increasingly important element of our logistics operations have been affected sales strategy. by current economic conditions, we have We have delivered excellent growth from maintained our profitability through cost our leading international cigarette brands. saving initiatives.

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Our Brand Performance Highlights

We have grown volumes of our leading cigarette brands.

Premium segment Mainstream segment Value segment +12% +1%1 +11%

1 Adjusted for shipment timings.

From a financial perspective, we have Corporate Responsibility Further enhancing our focus on sales, delivered significant working capital savings Our Corporate Responsibility strategy is whilst optimising our cost base and which have improved our strong cash integral to our overall business strategy effectively managing our cash, will ensure generation and enabled us to make a and is embedded throughout the Group. we continue to create sustainable considerable reduction in our debt levels. It is gratifying that our progress has shareholder value. Integration been recognised again, with a Bronze Class We made excellent progress with the rating from Sustainability Asset Management, integration of Altadis during the year. which analyses companies on behalf of the Dow Jones Sustainability Index. We completed consultations with trade Gareth Davis unions and works councils and implemented An overview of this year’s progress is Chief Executive our major European integration projects, provided on page 20 of this report. More including merging our sales and marketing detail will be available in our Corporate teams, enabling us to deliver a more Responsibility Review, to be published comprehensive service to our customers. in early 2010. A number of manufacturing restructuring Our People projects in Europe were also progressed. Key to delivering sustainable shareholder In addition, we closed two cigar factories in value is the continued development of our the USA and continued to align processes, people who once again have delivered systems and standards across our these excellent results. manufacturing operations. Looking around the Group today, I am very Regrettably, these projects have impacted encouraged by our significant and growing our employees and we continue to assist pool of talented employees. Our leadership all individuals affected with a comprehensive and development programmes are designed range of support measures. to support employees at all levels, from Regulation senior managers to those who are at an The tobacco industry has been subject to early stage of their career. increasing regulation for many years and We are committed to ensuring our we are confident of being able to continue employees continue to fulfil their potential to successfully develop our business in and share in the success of the Group. this environment. Outlook We believe that adults should have the In conclusion, we have made significant freedom to enjoy smoking whilst being operational and financial progress in a aware of the associated risks to their health. challenging environment. We support reasonable regulation of Our strong business fundamentals and tobacco products but will continue to successful growth strategy are the basis challenge disproportionate and unnecessary of our long-term sustainability. regulation that undermines the principles of adult choice and the freedom of competition. We will continue to drive further organic growth, leveraging our enhanced This type of regulation stigmatises smokers geographic footprint and our total and denormalises smoking and we strongly tobacco portfolio. believe that adult consumers and smoking should not be treated in this way.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Financial Review

STRONG FINANCIAL PERFORMANCE

Robert Dyrbus Finance Director

“We have made excellent progress on strengthening our balance sheet, delivering a cash conversion of 128 per cent including nearly £1 billion in working capital improvements.” Group Performance

REVENUE GROUP EARNINGS PERFORMANCE

In £s million 2009 2008 Adjusted Reported Tobacco 18,587 15,650 In £s million 2009 2008 2009 2008 Logistics 8,961 5,561 Profit from operations Eliminations (1,031) (683) Tobacco 2,750 2,107 2,291 1,531 Group revenue 26,517 20,528 Logistics 177 121 40 23 Eliminations 6 2 6 (83) Growth in revenue reflects a full year’s contribution from Altadis, operational Group profit from operations 2,933 2,230 2,337 1,471 progress and foreign exchange benefits. Net finance costs (700) (623) (1,392) (850) Profit before taxation 2,233 1,607 945 621 Taxation (581) (426) (268) (180) Profit for the year 1,652 1,181 677 441 Earnings per ordinary share (pence) 161.8 136.9 65.5 50.6

Adjusted profit from operations grew by 32 per share grew by 18 per cent to 161.8 per cent to £2,933 million (2008: £2,230 pence (2008: 136.9 pence) or 12 per million) reflecting a full year’s contribution cent excluding foreign exchange benefits. from Altadis, operational progress and Reported earnings per share were currency gains. Reported profit from 65.5 pence (2008: 50.6 pence) after operations was up 59 per cent to £2,337 a number of items which are detailed million (2008: £1,471 million). After net in the following table. finance costs and tax, adjusted earnings

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Key Financial Highlights

– Working capital savings of £1bn – Adjusted net debt reduction of over £2bn, excluding foreign exchange – Cumulative synergies of €190m delivered

RECONCILIATION OF ADJUSTED PERFORMANCE MEASURES Results have been adjusted in line with our normal practice and a reconciliation is provided below. Profit from Earnings operations Net finance costs per share (In £s million) (In £s million) (In pence) 2009 2008 2009 2008 2009 2008 Reported 2,337 1,471 (1,392) (850) 65.5 50.6 Acquisition accounting adjustments – 161 – – – 13.0 Amortisation of acquired intangibles 451 309 – – 37.4 31.8 Brand divestment gain – (174) – – – (13.6) Fair value adjustments on derivative financial instruments providing commercial hedges – – 660 272 46.9 22.8 Restructuring costs 145 463 – – 9.9 37.2 Post-employment benefits net financing cost/ (income) – – 32 (45) 2.1 (3.8) Adjustments above attributable to minority interests – – – – – (1.1) Adjusted 2,933 2,230 (700) (623) 161.8 136.9

Amortisation of acquired intangibles rose Significant movements in foreign exchange Our 2008 results included a gain of £174 from £309 million to £451 million reflecting and interest rates have led to fair value million on the sale of a number of fine cut a full year’s charge for Altadis. losses on derivative financial instruments and pipe tobacco brands to Philip Morris included in net finance costs of £660 International. They also included one-off The Group hedges underlying interest rate million (2008: £272 million). Previously an acquisition accounting adjustments relating and foreign exchange rate exposures in element of fair value gains and losses was to the valuation of inventory and the timing an efficient, commercial and structured included in profit from operations rather of recognition of profits on transactions manner. However, the strict requirements than net finance costs. This presentation between Imperial Tobacco and Altadis, of IAS 39 lead to some commercially has been amended to show all fair value which had no impact on the performance effective hedge positions not qualifying for gains and losses in net finance costs. This of the business or on cash flow. hedge accounting. As a result we recognise change in presentation is explained in more movements in the fair value of some of the detail in our Accounting Policies on page derivative financial instruments providing 77 and has no effect on adjusted earnings. commercial hedges in net finance costs, rather than directly in reserves under IAS The net financing cost of post-employment 39 hedge accounting. benefits amounted to £32 million compared with income of £45 million in 2008 and is We therefore exclude fair value gains and excluded from adjusted net finance costs. losses on derivative financial instruments providing commercial hedges from Restructuring costs amounted to £145 adjusted net finance costs. million compared with £463 million in 2008.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Financial Review continued

GEOGRAPHIC ANALYSIS OF TOBACCO

Adjusted profit Cigarette Fine cut tobacco Net revenue from operations volumes (bn) volumes (tonnes) In £s million 2009 2008 2009 2008 2009 2008 2009 2008 UK 893 869 601 584 20.8 21.4 2,650 2,350 Germany 826 664 403 309 23.9 23.0 5,550 4,300 Spain 610 411 275 150 30.3 23.0 2,350 1,550 Rest of EU 1,490 1,250 566 494 59.3 57.2 12,650 14,300 Americas 861 542 288 166 13.8 15.2 650 600 Rest of the World 2,138 1,502 617 404 174.1 154.3 2,100 2,050 Total 6,818 5,238 2,750 2,107 322.2 294.1 25,950 25,150

Geographic Analysis of Tobacco debt write-off of £17 million in the More details on our operational UK net revenue increased by 3 per cent Netherlands. Net revenue rose by 19 per performance are included on pages to £893 million and adjusted profit from cent to £1,490 million and adjusted profit 21 to 32 of this report. operations rose 3 per cent to £601 million. from operations by 15 per cent to £566 Restructuring and Synergies These results reflect price increases, a million. Adjusted profit from operations Profits also benefited from incremental stable duty paid cigarette market and includes a benefit of some £66 million synergies from the Altadis acquisition growth in fine cut tobacco volumes. related to strengthening of the euro and of €147 million or £128 million which other currencies against sterling. Growth in German net revenue was largely we delivered this year. Our cumulative attributable to a full year’s contribution from In the Americas, despite volume declines synergies to date are €190 million. There Altadis, price increases and growth in fine cut in the USA, net revenue increased by was an additional restructuring charge tobacco volumes. Net revenue rose by 24 £319 million to £861 million and adjusted of £145 million mainly in respect of the per cent to £826 million and adjusted profit profit from operations by £122 million to additional European integration projects from operations by 30 per cent to £403 £288 million as a result of price increases and the closure of our Tampa factory in million. Some £48 million of the increase in and a good operational performance in the USA. adjusted profit from operations related to the USA, as well as the inclusion of a full strengthening of the euro against sterling. year’s contribution from the Altadis cigar Net revenue in Spain increased by £199 business. The strengthening of the US million to £610 million and adjusted profit dollar against sterling accounted for from operations by £125 million to £275 £58 million of the increase in adjusted million reflecting a full year’s contribution profit from operations. from Altadis and increased prices. £36 In the Rest of the World, we delivered a million of the increase in adjusted profit strong performance with improvements from operations related to strengthening in the majority of markets. Net revenue of the euro against sterling. increased by 42 per cent to £2,138 million In the Rest of EU, a good performance in and adjusted profit from operations by France and in many of our other markets 53 per cent to £617 million. Currency across the region was mainly offset by movements accounted for £83 million of the volume declines in travel retail and a bad increase in adjusted profit from operations.

LOGISTICS Logistics adjusted profit from operations was £177 million compared with In £s million 2009 2008 £121 million for the eight months to Distribution fees 964 607 30 September 2008. This segment has been impacted by economic conditions, Adjusted profit from operations 177 121 partly offset by cost initiatives. Adjusted distribution margin per cent 18.4% 19.9%

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ADJUSTED NET DEBT MOVEMENT: AVERAGE LEVEL £12.8bn (2008: £11.3bn)

Operating Cash Strong cash flows from Opening 2.9 Flow after Net Net Debt operating activities Capex: £3.7bn complemented by £11.5bn Closing Net Debt £10.8bn 1.4 working capital savings have reduced our adjusted net debt

0.7 Closing Net Debt £9.4bn by over £2 billion, Pre Foreign Exchange excluding the impact 1.0 0.9 of foreign exchange.

0.2 Adj Proﬁt Working Net Tax & Dividends Foreign from Ops Capital Capex Interest Exchange

Note: Adjusted debt figures exclude accrued interest, fair value gains and losses on derivatives providing commercial cash flow hedges and finance lease liabilities.

Net Finance Costs Cash Flow and Financing At 30 September 2009, we had committed Adjusted net finance costs were £700 million Our business remains highly cash financing facilities in place of around (2008: £623 million). On an adjusted basis, generative and we converted 128 per £15 billion. our interest cover was 4.2 times (2008: cent of our adjusted profit from operating 3.6 times). Reported net finance costs of activities after net capital expenditure into Pensions Our net retirement benefit liabilities £1,392 million (2008: £850 million) include cash, as a result of significant working increased during the year from £105 million post-employment benefits net finance capital savings of £985 million. This to £794 million, mainly due to the effects expense of £32 million (2008: income excellent improvement was delivered of revised actuarial assumptions, including £45 million) and fair value losses on through various group wide initiatives a significantly lower discount rate in line derivative financial instruments providing focused on optimising our finished goods with movements in bond markets. commercial hedges of £660 million and tax stamp inventories and reducing (2008: £272 million). our trade receivables. Additions and Fixed Asset Disposals Our cash outflows included gross capital Taxation Strong cash flows from operating activities expenditure of £253 million (2008: £226 The adjusted tax charge for the period complemented by working capital savings million), the increase reflecting disciplined was £581 million (2008: £426 million) have offset the significant increase in our investment in machinery and equipment representing an adjusted effective tax debt due to the strengthening of both the across our expanded footprint. Disposal rate of 26.0 per cent (2008: 26.5 per cent). euro and the US dollar against sterling. of surplus Altadis properties contributed to The reported tax charge was £268 million Excluding the impact of foreign exchange an increase from £34 million to £69 million (2008: £180 million). we reduced our adjusted net debt by in proceeds from the sale of fixed assets. over £2 billion. Foreign Exchange Tobacco net revenue benefited by £754 Our adjusted net debt was £10.8 billion million due to currency effects, mainly as (30 September 2008: £11.5 billion; a result of the appreciation of the euro and 31 March 2009: £14.0 billion). the US dollar against sterling. Logistics The denomination of our closing adjusted distribution fees were increased by £122 net debt was 56 per cent euro, 31 per million as a result of currency effects. Group cent US dollar and 13 per cent sterling. adjusted profit from operations benefited Our all-in cost of debt was stable at from currency effects of £306 million. In 5.5 per cent (2008: 5.5 per cent). calculating the impact of foreign exchange movements, we adjust for the translation At 30 September 2009, our reported impact and also the transactional impact net debt which includes accrued interest, on leaf costs. the fair value of derivatives providing commercial cash flow hedges and finance Dividends lease liabilities had increased to £12.0 billion The Board has proposed a final dividend from £11.7 billion at 30 September 2008. of 52.0 pence per share such that the total Our reported net debt was £15.2 billion dividend for the year is 73.0 pence. This at 31 March 2009. represents growth of 16 per cent, as adjusted for the bonus element of the rights During the year we successfully raised issue in June 2008. Subject to approval by £3.9 billion through the capital markets shareholders this dividend will be paid on which coupled with the working capital 19 February 2010 to those shareholders reduction and ongoing cash generation on the register at close of business on leaves us with no refinancing requirements 22 January 2010. until July 2012.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Strategic Review

MAXIMISING OUR GROWTH POTENTIAL

Alison Cooper Chief Operating Officer

“Our track record of creating sustainable shareholder Our strategy is underpinned by three core objectives – sales growth, cost value has been impressive over many years and optimisation and effective cash utilisation. These are the building blocks of our has been driven by the consistent application of business and we are committed to our strategy.” delivering a strong performance in each of these areas. Our enhanced focus on sales is a key driver in creating value for our shareholders and strengthening the long-term sustainability of our business. As a global tobacco company we recognise the importance of manufacturing, marketing Our strategy is to and selling our products responsibly. This create sustainable underpins our growth strategy and is an shareholder value integral part of how we do business. by growing our Our overall strategic Key Performance Indicators (KPIs) are total shareholder return and adjusted earnings operations organically per share. and through acquisitions 1 Sales growth 1 We are a sales led business, with strong Sales positions in both mature and emerging markets and sales in over 160 countries. growth Our balanced operating platform provides stability and creates future 3 growth opportunities. We have invested strategically to create a Cash comprehensive and balanced brand and utilisation product portfolio, in turn facilitating a total 2 tobacco focus, which considerably Cost enhances our growth potential. optimisation Our international strength in cigarette is complemented by world leadership in cigar, fine cut tobacco, papers and tubes and a small but growing snus business.

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World Tobacco Market

Industry Overview Consumer demand will continue to The cigar market is broadly stable and is The world cigarette market is broadly evolve, with ongoing downtrading in concentrated in the developed markets stable with around six trillion cigarettes mature markets as well as uptrading of Western Europe and the USA, with consumed globally each year, including in emerging markets. growth in the emerging markets of China which accounts for around a third Eastern Europe and Asia. of total global consumption. The last decade has been characterised by increasing regulation, particularly in mature Industry Growth Opportunities Excluding China, the four largest western markets where legislation on While the tobacco industry is mature, international tobacco companies, Philip tobacco advertising, health warnings and we believe that there are still many Morris International, British American smoking in public places is commonplace. opportunities to grow profits organically Tobacco, Japan Tobacco and Imperial Regulation is also rapidly developing in and potential further bolt-on acquisitions. Tobacco, hold 69 per cent of the total emerging markets. cigarette market. Organic growth opportunities include Excise duties have also increased, volume development across emerging Smoking incidence is expected to especially in developed markets and, as markets and product categories, market continue to decline in developed mature prices have increased, consumers seeking share gains from competitors, entry into markets, as the percentage of smokers value have downtraded to value brands new markets, new brand launches and within total populations reduces. However, both within cigarette and into other the introduction of additional products in this is offset by growth in emerging tobacco products. As a result, the other existing markets. In the context of broadly market regions, as the number of adults tobacco products sector has grown and stable global market volumes and subject in those regions is expected to grow. this trend is expected to continue. to specific market dynamics, we anticipate that price increases will increase industry revenues and profits.

We have strong local, regional and 3 Cash Utilisation Measuring our Strategy: international brands with representation Key performance indicators are the across the key price segments within We are highly cash generative. We focus principal measures used by the Board to individual markets. on managing capital expenditure, working assess performance against our strategy. capital, tax and interest costs to optimise These portfolio strengths, combined with our cash flows and ensure that the cash On pages 14 and 15 we highlight how our focus on trade marketing and on our we generate is used effectively. we measure each of our core objectives. consumers, are key to sales development. Our short-term focus is on debt reduction Risk Management: We ensure that individual markets have the following the acquisition of Altadis. We also A detailed assessment of strategic flexibility to align local portfolios to specific continue to make disciplined investments risks within our operating environment local market and consumer dynamics, across the business to enable us to is undertaken by management and is within a Group strategic framework. continue to deliver sustainable growth. embedded across the Group. We seek to be agile in responding to While debt reduction will remain a priority, On pages 16 and 17 we provide an update changing market dynamics ensuring our given our very strong cash flows, we on the principal risks that may impact on brands and products remain relevant to believe we will have scope for further value our business and the management controls evolving consumer preferences enabling creating acquisitions and strategic alliances we have put in place to mitigate them. our highly skilled sales forces to drive within a reasonable timeframe. Leveraging our Assets: growth across our portfolio. Our total tobacco focus on pages 18 Cash conversion is an essential prerequisite to cash Our sales growth KPIs are cigarette volumes and utilisation, therefore our cash conversion rate is the KPI. and 19 demonstrates how we grow sales. tobacco net revenue. On pages 29 and 30 we highlight how we are continuing to develop our business in Morocco. 2 Cost optimisation Corporate Responsibility: Cost optimisation is a hallmark of our We manage our business to ensure we business. We seek maximum returns maintain the high standards of conduct from our investments and seek efficiency and performance expected of an improvements without compromising our international company. focus on quality and innovation. We have a long history of value creating acquisitions On page 20 we give an overview of our and are renowned for our ability to integrate progress during the year with more detail new businesses swiftly and efficiently. in our CR Review, due to be published on our website in early 2010. This year we have delivered our integration synergy targets whilst driving business initiatives and improvement across the Group.

Our cost optimisation KPI is tobacco adjusted operating margin.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Strategic Review continued

Our Key Performance Indicators (KPIs)

Our core objectives of sales growth, cost optimisation and cash management are directly underpinned by a set of key performance indicators. These are the principal measures used by the Board to assess performance and continuous improvement in line with our strategy. Certain of these are linked to executive remuneration.

TOTAL SHAREHOLDER RETURN In 2009, we underperformed the FTSE All-Share Imperial Tobacco 200 Index by 6 per cent however, over the past 10 years we have outperformed by 286 per cent and over three years +30% -5% +5% we have outperformed by 33 per cent. +5% 150 With dividends reinvested, £100 invested in FTSE All-Share + 11% Imperial Tobacco 10 years ago would now be worth £517, compared to just £134 invested in the FTSE 100 All-Share Index. Definition +12% -22% +11% Total Shareholder Return is the total investment gain to shareholders KPI: Shareholder Value 50 resulting from the movement in the share price and assuming dividends 090807 are immediately reinvested in shares. Imperial Tobacco FTSE All share ADJUSTED EARNINGS PER SHARE Our focus on sales growth, cost optimisation and effective cash and tax management has enabled us to deliver 18 per cent growth in adjusted earnings per share. 161.8p Over the past ten years, our adjusted earnings per share has grown by 15 per cent on a compound annual basis. % Definition

+18 161.8p Adjusted earnings per share is adjusted profit after tax attributable to the equity holders of the Company divided by the weighted average number 136.9p of shares in issue during the period excluding shares held to satisfy 118.8p employee share plans and shares purchased by the Company and KPI: Shareholder Value held as Treasury shares. 090807

CIGARETTE VOLUMES We increased our global cigarette volumes by 10 per cent to 322.2 billion cigarettes. We are a diversified tobacco company with a strong 322.2bn presence in both mature and emerging markets. This balanced operating platform provides stability and creates future growth opportunities.

+10% 322.2bn

294.1bn We are growing our volumes in emerging markets including in Eastern Europe, Africa, the Middle East and Asia, which account for 51 per cent of our KPI: Sales Growth 200.3bn overall cigarette volumes. Definition 090807 Cigarette volumes are the number of units sold in the period.

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TOBACCO NET REVENUE We are a sales led business and grow our tobacco net revenues by leveraging our total tobacco portfolio and our balanced geographic footprint. 6.8bn Our international strength in cigarette is supported by world leadership in cigar, fine cut tobacco, papers and +30% 6.8bn tubes and a small but growing snus business. We have strong local, regional and international brands 5.2bn with representation across the key price segments within individual markets. 3.3bn KPI: Sales Growth Definition Tobacco net revenue comprises revenue less duty and similar items. 090807 We consider this an important measure in assessing the profitability of Tobacco operations. TOBACCO ADJUSTED OPERATING MARGIN Our focus on optimising our cost base balanced with targeted investments has enabled us to achieve a tobacco % operating margin of 40.3 per cent. 40.3 Our operating margins were impacted by the change in business mix following the Altadis acquisition in early 2008. 45.0% 40.3% 40.2% In the first comparable reporting period, our tobacco adjusted operating margin was up in the second half of 2009 to 40.6 per cent compared to 38.9 per cent in the second half of 2008. KPI: Cost Optimisation Definition The tobacco adjusted operating margin is the adjusted profit from 090807 operations for the Tobacco segment divided by net revenue for the Tobacco segment. CASH CONVERSION RATE Strong cash generation has been a consistent hallmark of Imperial Tobacco and remains a key priority for the Group. Our long-term target is to convert around 100 per cent of 128% our adjusted operating profit after net capital expenditure into cash.

128% We delivered a cash conversion rate of 128 per cent. Strong operational cash flows were enhanced by working 86%

81% capital savings of £1 billion in the year, taking both our three and five year averages to over 100 per cent. Definition KPI: Cash Utilisation Cash conversion is calculated as cash flow from operations before tax payments less net capital expenditure relating to property, plant and 090807 equipment and software as a percentage of adjusted profit from operations.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Strategic Review continued

display, marketing and advertising. It is expected that further regulation Principal Risks and Uncertainties will be implemented. The Group along with all other tobacco manufacturers is often excluded from engaging with regulators on these regulatory proposals. Any future increases A detailed assessment of strategic in regulation of the tobacco industry could risks within our operating environment have an adverse effect on the demand for our products or increase the costs related is undertaken by management and is to compliance and could contribute to embedded across the Group. an increase in illicit trade. Mitigation We employ a number of senior and experienced Corporate Affairs specialists to manage regulatory risk and where possible engage with regulators. We monitor proposals for new measures globally and Our principal risks and Each area of the business is required to analyse them to identify their potential formally review its principal areas of risk impact on the Group and its products. uncertainties may be and uncertainty so that major risks are reviewed at all levels across the Group. External experts are consulted where categorised as follows: necessary to provide advice and guidance This is an ongoing process, ensuring there regarding any impact. Active membership – Regulation are clear and consistent procedures for of industry bodies assists us in clearly – Excise Duty and monitoring, updating and implementing understanding the implications of any appropriate controls to manage the change in regulation and helps to make Illicit Trade identified risks. engagement on key issues consistent – Key Market This process is supplemented by the so that opportunities are maximised. Dependency Risk Co-ordination Committee which We develop Company positions and assists the Chief Executive’s Committee toolkits and provide training and guidance – Competition Law and the Audit Committee in overseeing the for our markets to comply with regulation. – Tobacco-Related management of material risks. The Board has responsibility for the Group’s systems of Litigation internal control. A more detailed description Excise Duty and – Financing of these systems is set out in our Corporate Illicit Trade Governance report. Overview We are subject to the same general risks Increasing levels of excise duty are likely and uncertainties as any other business; to encourage consumers in affected for example, the political stability in the markets to switch from premium-priced countries in which we operate and source cigarettes to lower-priced cigarettes our raw materials, the impact of natural and fine cut tobacco, or to turn to disasters and changes in general economic illicit sources. conditions including currency and interest rate fluctuations, changes in taxation Tobacco products are subject to excise legislation, the cost of our materials and duty which, in many of the markets in the impact of competition. which we operate, represents a substantial percentage of the retail price and has been Outlined below is a description of the steadily increasing in recent years. principal risks and uncertainties that are specific to and may impact our business. Substantial increases in excise duty and Not all these factors are within the Group’s any significantly unfavourable change in the control. There may be other risks and tax treatment of fine cut tobacco, if widely uncertainties which are unknown to the adopted, may have an adverse effect on Group or which may not be material now the size of individual duty paid markets but could be material in the future. for our products. Excise duty increases also encourage both Regulation legal and illegal cross-border trade from countries with lower levels of duty in the Overview form of genuine product smuggled illegally, The tobacco industry is subject to cheap whites (whereby a small manufacturer substantial and increasingly restrictive produces product paying minimal tax, for the regulatory practices worldwide. purposes of smuggling) and the production of counterfeit tobacco products. In many of the countries in which we operate, there are regulatory restrictions Illicit trade creates a market that is affecting a wide range of matters including uncontrolled and unaccountable. As a result, where tobacco products can be smoked children can more easily obtain tobacco and their development, content, products, governments are deprived of tax manufacture, packaging and labelling, revenues and the livelihoods of independent testing, data reporting, sale, distribution, tobacco retailers are threatened.

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Moreover, illicit trade may lead to erosion acquisition. Our extended footprint damages, and may lead to further claims of our brand integrity, loss of potential provides a more balanced exposure to against us. Regardless of the outcome of earnings, undermine supply chain mature and emerging markets, while our pending litigation, the costs of defending distribution investments and potentially enlarged portfolio includes international such claims can be substantial and may impact our reputation. strength in cigarette and world leadership not be fully recoverable. in fine cut tobacco, cigars, rolling papers Within such an environment there is a risk Further details on market specific litigation and tubes. We also have a leading logistics that we and/or our employees may be claims against Group companies are platform in Europe. This provides us with subject to investigation or other proceedings outlined on page 54. enhanced growth opportunities and by customs or other authorities. has resulted in individual key markets Mitigation Although we have implemented procedures contributing a lower percentage of the We employ internal and external lawyers to detect and control illegal trading of our Group’s adjusted profit from operations. specialising in the defence of product products, such procedures can provide liability litigation, to provide advice and The performance of our key markets is only reasonable and not absolute assurance guidance on defence strategies and to reviewed as part of our regular business of detecting non-compliance by managing direct and manage litigation risk and review process whereby senior executives rather than eliminating risk. monitor potential claims around the Group. responsible for the key markets present Further information regarding certain an in-depth analysis of performance to investigations initiated in January 2003 members of the Chief Executive’s Committee. Financing in relation to alleged foreign trading and related violations by a number of people, Overview including former Reemtsma employees, Competition Law The Group has significant borrowings during a period prior to our 2002 acquisition which may impair operational and Overview of Reemtsma, is included in our Corporate financial flexibility and performance. We have significant market positions Governance Report on page 53. in certain countries. The Group’s indebtedness could potentially Mitigation cause us to dedicate a substantial portion As a result, we may be subject to enhanced We are committed to working with of cash flow from operations to payments regulatory scrutiny in these countries, which government authorities and international to service debt depending on the level of could result in investigations and adverse organisations around the world and we borrowings, prevailing interest rates and regulatory action by relevant competition continue to invest considerable resources exchange rate fluctuations, which would authorities, including the potential for in working to counter the illicit trade in reduce the funds available to the Group monetary fines, and negative publicity. tobacco products. for working capital, capital expenditure, Further information regarding an enquiry acquisitions, dividends, and other general We apply stringent controls to our by the UK Office of Fair Trading is included corporate purposes. It could also limit the customers in the form of our Group policies in our Corporate Governance Report on Group’s ability to borrow additional funds and standards, Code of Conduct and page 53. for these purposes and limit flexibility in product supply compliance processes planning for, or reacting to, changes in and procedures. Mitigation technology, customer demand, competitive The Group’s policies and standards, Our dedicated brand protection and pressures and the industry in which the including our Code of Conduct, mandate security specialists operate internationally in Group operates. that all employees must comply with conjunction with governments and customs competition laws in the countries in which This could place the Group at a competitive and excise authorities to disrupt the supply we operate. disadvantage compared to its competitors and sales of illicit product. These controls that are less leveraged, and increase our are supported by sophisticated information We employ experienced internal and vulnerability to both general and industry collection and analysis practices and external lawyers specialising in competition specific adverse economic conditions. tracking and tracing, product authentication laws to provide advice and guidance Our credit ratings may be adversely affected and volume verification solutions. regarding interpretation and compliance if this happens and/or if conditions in credit with competition laws. As part of our corporate planning process markets are unfavourable at a time when we and at an individual market level we conduct In addition, we provide training and are looking to refinance our current sources regular reviews of our product portfolio to guidance to relevant employees detailing of financing, and as a result we may not ensure it is aligned to consumer preferences the obligations and requirements of be able to obtain new sources of financing in the context of increases in excise duty. competition laws. or only be able to do so at higher costs. Mitigation Key Market Dependency Tobacco-Related Litigation The Group has established a centralised treasury function, which is responsible for Overview Overview the management of the financial risks of Any material decline in the performance Tobacco litigation claims are pending the Group, together with its financing and of our key markets may impact on our against the Group in a number liquidity requirements. future profit development. of countries. Further details of the Group’s treasury The continued growth of the business is More claims are likely to be brought in the operations and the approach to managing underpinned by our key markets including future including claims for personal injury these risks can be found in Note 16 to the the UK, Germany and Spain. Negative and claims to recover the alleged costs Financial Statements on pages 98 to 111. development in any of our key markets of providing medical care to individuals could have a material adverse impact with diseases associated with smoking. on the Group’s revenue or profits. To date, no tobacco litigation claim brought Mitigation against the Group has been successful Our international footprint and brand and and/or resulted in the recovery of damages. product portfolio have been considerably However, if any claim were to be successful, strengthened following the Altadis it may result in a significant liability for

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Case Study

A TOTAL TOBACCO FOCUS OUR POWERFUL PORTFOLIO SPANS ALL TOBACCO PRODUCT CATEGORIES

Portfolio Strength We leverage our portfolio to build sales and Our comprehensive brand and product portfolio considerably enhances our growth continually review our brands and products opportunities. We have strong local, regional and international brands across all key to ensure they are aligned with local price segments within individual markets consumer preferences. allowing us to meet changing consumer needs. This portfolio strength, combined with trade marketing excellence and our agility in anticipating and responding to changing market dynamics and consumer preferences drives sales growth. Our Balanced Portfolio Cigarettes Our success with Davidoff and JPS in recent years has been particularly pleasing. These brands operate at opposite ends of the cigarette price spectrum and both have INTERNATIONAL STRENGTH WORLD NO.1 IN FINE seen consistent volume increases year IN CIGARETTES CUT TOBACCO on year. We have grown global volumes of Davidoff, our key international premium cigarette brand by 27 per cent over the past 5 years, achieving particular success in the Middle East, Eastern Europe, Taiwan and Greece. Saudi Arabia, the largest individual market for Davidoff worldwide, accounts for 16 per cent of global Davidoff volumes, with Total compound annual growth of 43 per cent in the past five years. In Greece, with Tobacco successful line extensions, we have grown WORLD NO.1 IN WORLD NO.1 Davidoff to become the leading brand in PAPERS & TUBES IN CIGARS the premium segment. Whilst building sales of Davidoff in our emerging markets we have focused on growing our value brands in mature markets, where consumer downtrading is a key dynamic. We have achieved tremendous success with JPS in Western Europe and further built on the brand’s successful track record in the year, improving volumes by 11 per cent. Our performance in Germany has been exceptional, growing JPS sales consistently

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Davidoff has 01 grown global volumes by 27% in the past five years.

over a five year period to establish it as 01 Davidoff is our the second largest cigarette brand in the 02 key international country, with a market share of 8.5 per cent. premium cigarette brand. To maximise the brand’s growth potential 02 JPS is a highly and strengthen our German portfolio popular value brand we also introduced JPS make your own, in Western Europe. roll your own and eco-cigarillo products, capturing 7.6 per cent market share of the other tobacco products sector. A Portfolio Approach: Other Tobacco Products Our other tobacco products business complements our cigarette portfolio and ensures a total tobacco focus across the Group. We are world leaders in cigars and fine cut tobacco, papers and tubes. We also have a small but fast growing of prestigious cigar brands including Our snus business is in Sweden, where snus business. Cohiba, Montecristo and Romeo y Julieta. the product is exempt from an EU wide These are supported by our local brands ban, and in Norway, although we continue Fine Cut Tobacco which hold strong domestic positions in our to evaluate the potential for expanding into Downtrading from cigarettes into fine key markets of the USA, Spain and France. other markets. cut tobaccos, such as roll your own and make your own products is common in Increasing smoking restrictions and the Our involvement in snus, a moist oral developed Western European markets, current economic climate have impacted tobacco product that is placed under where fine cut tobacco consumption is cigar volumes, particularly in the premium the upper lip, began in September 2005, largely concentrated. Downtrading within segment. We have also seen a trend through the purchase of a 43.1 per cent fine cut tobacco from premium to value towards smaller cigar formats with growth stake in the Swedish company Skruf. brands is also increasing. in mass market cigars as consumers In 2008 we increased our stake to 100 downtrade. We are focused on improving per cent. We have built strong positions across the profitability of our cigar business Western Europe and are growing our through cost management and using In 2006, we extended our snus portfolio presence in Central Europe and in the our broad product portfolio and our beyond the flagship Skruf premium brand USA. Our premium brands, Golden Virginia innovation capabilities to adapt to the with our value brand Knox. We have and Drum, underpin our world leadership. changing environment. achieved excellent results, particularly in Norway where we have an 18 per cent However, to ensure our fine cut tobacco Papers, Tubes and Snus market share. portfolio is well suited to changing consumer Our rolling paper brands account for more preferences, our portfolio development than a third of global paper volumes and initiatives have increasingly focused on are sold in more than 50 markets worldwide. strengthening our position in the value Rizla is the world’s leading papers brand segment and developing fine cut tobacco and number one in the UK, Belgium, variants of cigarette brands. Greece, Italy and Finland.

Cigars Our filter tubes brands are available in around We have a unique portfolio of cigar brands 30 countries, principally in Western Europe Visit www.imperial-tobacco.com and products. Through Habanos, our and North America, and our key filter tubes for more information. Cuban joint venture, we have a number markets include Germany and the USA.

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DIRECTORS’ REPORT: BUSINESS REVIEW: STRATEGICANDFINANCIALREVIEW Corporate Responsibility

OUR RESPONSIBLE APPROACH

Climate Change and Carbon Our Corporate Responsibility (CR) strategy is integral Management to our overall business strategy and is embedded We remain committed to minimising our environmental impacts and regularly review throughout the Imperial Tobacco Group. our policy and performance at Board level. Our environmental management systems are based on ISO 14001. Analysing energy

consumption and CO2 emissions throughout the Group has been a key task for us during the year and we remain on course to meet our 2010 reduction targets relative to tobacco production for energy consumption, Overview International Marketing Standards which waste and waste to landfill and for absolute Building trust with our stakeholders and are published in full on our corporate reduction in CO2 emissions. acting with integrity at all times is critical to website, as well as policies covering Employees our success, our global reputation and our employment, fairness at work and As a responsible business we take care long-term sustainability. employee engagement, wellbeing and of our employees’ health and safety and health. In addition, we provided training Key issues managed within our CR strategy treat our people with fairness, dignity and held a number of workshops to include business conduct and accountability, and respect. Employee engagement is improve the business knowledge and product stewardship and assessment, fundamental to our success and we understanding of our employees, with responsible sales and marketing, fairness actively promote two-way dialogue. a particular focus on occupational health and respect for employees, occupational and safety, product supply compliance Social plans related to the integration of health and safety, supplier sustainability, and science and stewardship. Imperial Tobacco and Altadis and agreed environmental impact and community with European trade unions and works involvement. Details of our performance During the year we also began an extensive councils have included comprehensive in each of these areas are available in our review of our Code of Conduct, which sets employee support measures. Corporate Responsibility Review. out the responsible behaviours we expect from our employees. The review will be The occupational health and safety of our In 2007 we identified five particular areas completed in 2010 and the updated employees is of paramount importance to of focus for the next five years: code will be communicated throughout us and is monitored by the Board. Our – further increasing transparency in how the Group. ongoing programme of employee training we adhere to our Group policies and performance reporting is designed to Product Portfolio Balance reduce work-related injury and ill health, – empowering local management to We continually review our product portfolio and has been a key area of focus during better address CR issues for unnecessary complexity ensuring that this period of organisational change. we meet the needs and preferences of our – product portfolio balance consumers whilst recognising increasing Our Corporate Responsibility Review will – supplier sustainability product stewardship and regulatory be published in early 2010. Data will be demands. Reducing the complexity of our independently verified by SGS United – better carbon management. portfolio by rationalising or re-specifying Kingdom Limited. The accuracy and Following the acquisition and integration brand variants and improving systems and reliability of our CR progress has been of Altadis we are now planning a further processes is being managed by a newly reported on by Corporate Citizenship. review of these issues to ensure that we established cross-functional team. A new have the right CR framework in place for approach to complexity evaluation and the enlarged business. reduction will be rolled out in 2010. The review will also take into account the Supplier Sustainability views of our new Stakeholder Panel, We work with our suppliers to safeguard which was convened this year to critically future supplies and improve social, appraise our performance. The panel environmental and economic standards includes representatives from our main in the supply chain. The scope of our stakeholder groups including consumers, commitment covers tobacco, non-tobacco customers, suppliers and employees. materials and sales and marketing-related items. Our 2009 focus has been on A summary of our 2009 achievements in reviewing our procurement activities in our five focus areas is outlined below. order to further improve supplier practices. Policies, Standards and Management We continue to work with the Social Accountability Responsibility in Tobacco Production Our Corporate Responsibility Review, which has further We continually review and communicate programme to monitor the performance information on our performance, will be published on our policies and standards so they are of our tobacco suppliers. We are also a our website in early 2010.

aligned with our developing business and Board member of the Eliminating Child universally understood by our employees. Labour in Tobacco Foundation and Visit the CR section of our website We updated a number of our corporate encourage supplier compliance with www.imperial-tobacco.com documents in the year, including our international standards on child labour.

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02 2 OPERATING REVIEW

In this section: 22 Our Diverse International Footprint 23 United Kingdom 24 Germany 25 Spain 26 Rest of EU 27 Americas 28 Rest of the World 29 Case Study: Morocco 03 31 Manufacturing 32 Logistics

Our Total Tobacco Portfolio 01 Our Rizla brand is the world’s leading papers brand. 02 West is our second best selling cigarette brand. 03 Gold Leaf is positioned in the growing value fine cut tobacco segment in the UK.

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DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Our Diverse International Footprint

HOW WE HAVE PERFORMED

We have strong positions in both CIGARETTE VOLUMES % mature and emerging markets. This geographic balance provides stability and creates a strong operating platform from which to maximise the potential of Developed Emerging our brands and drive sales. markets markets 49% 51% In our mature markets we have strength across our product categories and a focus on profitability. We are the second largest cigarette company in the European Union and are market leader in the UK and Spain with a strong number two position in Germany and France. These core profit centres account for around half of our Group profit. Last year in the EU we sold over 134 billion cigarettes, 23,000 tonnes of fine cut tobacco and nearly a billion cigars, growing net revenues by 19 per cent to £3.8 billion and profits by 20 per cent to over £1.8 billion. ADJUSTED PROFIT FROM OPERATIONS % In the USA we are investing to further develop our established cigarette, fine cut tobacco and cigar positions and our

Logistics businesses in Australasia consistently 6% deliver high margins and profit growth. We are growing our volumes in emerging markets which account for 51 per cent UK of our overall cigarette business. With Rest of the investment priorities in Eastern Europe, World 21% 21% Africa and the Middle East our focus is on organic sales growth. In all our markets, local insight is key to maintaining our growth momentum and we Germany continually seek to align our local portfolios with evolving consumer preferences in 14% order to maximise our sales potential. Americas

10% Spain Detailed performance on our reporting regions of the UK, Germany, Spain, 9% Rest of EU, Americas and the Rest of the World as well as on our manufacturing

operations and our logistics business Rest of follows on pages 23 to 32. EU 19%

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United Kingdom

PERFORMANCE HIGHLIGHTS UNITED KINGDOM Adjusted profit from operations %

£601m UK Adjusted profit from operations 21% £893m Net revenue

CIGARETTE FINE CUT TOBACCO The UK’s two best selling brands, Lambert & Butler and Richmond continue to hold over 30 per cent of the overall cigarette market. In fine cut tobacco we have grown volumes by 13 per cent. However, our premium brands Golden Virginia and Drum remained under pressure as a result of downtrading, impacting our market share which was 58.0 per cent (2008: 61.6 per cent). In the growing fine cut tobacco value 2009 2008 2009 2008 segment, Gold Leaf has continued to Volumes 20.8bn 21.4bn Volumes 2,650t 2,350t benefit from downtrading with market Market size1 45.3bn 45.5bn Market size1 4,450t 3,750t share up to 3.8 per cent (2008: 2.6 per 1 1 cent). We launched Golden Virginia Yellow Market share 45.3% 45.9% Market share 58.0% 61.6% in March to further strengthen our position 1 Imperial Tobacco estimates. 1 Imperial Tobacco estimates. in the value segment, with encouraging initial results. Outlook We expect a more normal rate of decline Market Dynamics initiation in the few countries where in duty paid cigarette volumes of around We estimate that the duty paid cigarette they have been introduced. We remain 2 per cent in the coming year and market was broadly stable at 45.3 billion concerned that such legislation places further growth in duty paid fine cut cigarettes (2008: 45.5 billion) benefiting an unnecessary burden on retailers and tobacco volumes. from fewer purchases of UK brands exacerbates illicit trade. We support practical abroad, as a weaker economy and sterling initiatives that will reduce youth smoking We believe the diversity of our brand and exchange rate reduced overseas travel. but will continue to oppose disproportionate product portfolio along with our commitment and unnecessary regulation. Downtrading has continued to be the major to sales excellence should provide further opportunities to grow our profits within dynamic in the UK tobacco market with Our Performance a downtrading environment. strong growth in the economy cigarette In the UK, net revenue was £893 million segment. This segment now accounts for (2008: £869 million), with adjusted profit We remain focused on balancing our 15 per cent of the total cigarette market from operations of £601 million (2008: market leading shares with sustainable (2008: 11 per cent). £584 million). profit growth. As a result of downtrading and reduced We continued to focus on our strategy overseas travel, the fine cut tobacco of balancing profit and market share market continued its strong growth trend, in the UK where we are the leading up by 19 per cent to 4,450 tonnes (2008: tobacco company. 3,750 tonnes). Our overall cigarette market share was In January, we increased our prices and in 45.3 per cent (2008: 45.9 per cent). April the Chancellor raised tobacco duties We continue to increase our share of by 7 pence per pack of 20 cigarettes. the economy segment up to 31 per cent We were disappointed that MPs voted to (2008: 29 per cent), as a result of growth in ban the display of tobacco products when JPS Silver. Launched in November 2008, debating the Government’s Health Bill. JPS Silver has delivered excellent results There is no compelling evidence which with a market share of 3.3 per cent in shows that tobacco display restrictions September. Since we repositioned Windsor have reduced either the consumption of Blue in July to capitalise on the growing tobacco products or youth smoking economy segment its share has improved.

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DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Germany

PERFORMANCE HIGHLIGHTS GERMANY Adjusted profit from operations % £403m Adjusted profit from operations

Germany 14% £826m Net revenue

CIGARETTE OTHER TOBACCO PRODUCTS Outlook As in the UK, our strategy in Germany is to continue to balance market share and profit growth. We will continue to align our versatile brand and product portfolio with consumer preferences, and believe we are well positioned to capitalise on the downtrading trends. In addition, Gauloises Blondes will be incorporated into our distribution network 2009 2008 2009 2008 from April 2010. Volumes 23.9bn 23.0bn Volumes 5,550t 4,300t Market size1 85.8bn 87.8bn Market size1 24,500t 22,550t Market share1 27.3% 27.4% Market share1 19.6% 19.9%2

1 Imperial Tobacco estimates. 1 Imperial Tobacco estimates. 2 Restated to reflect a changed basis of calculation.

Market Dynamics Our Performance We estimate that duty paid cigarette In Germany, net revenue was £826 million market volumes were down by 2 per cent (2008: £664 million) with adjusted profit to 85.8 billion cigarettes (2008: 87.8 billion). from operations up to £403 million (2008: £309 million). Downtrading remains a key dynamic in Germany, with the low price branded We delivered a strong performance with cigarette sector continuing to grow, our value brand JPS up to 8.5 per cent accounting for 27 per cent of the total (2008: 7.8 per cent), further consolidating its cigarette market (2008: 24 per cent). position as the number two cigarette brand. In June, we increased prices of our Our premium brands performed robustly, cigarette brands and our traditional fine cut with Davidoff, Gauloises Blondes and tobacco products, including a 20 euro cent R1 maintaining market share. We have increase on all packs of 17 cigarettes. introduced West maxi-packs and soft packs to further support the brand franchise. In July, the minimum pack size for cigarettes increased from 17 to 19 cigarettes and we These brand performances ensured our raised prices proportionately at that time. overall cigarette market share was broadly stable at 27.3 per cent (2008: 27.4 per cent). We estimate that the overall other tobacco products market was up by 9 per cent to We are market leaders in the other tobacco 24,500 tonnes (2008: 22,550 tonnes), with products sector. We increased our volumes strong growth in private label make your as a result of a strong performance from own products. Route 66, growth in JPS and additional private label contracts which began in October last year. However, our overall market share declined to 19.6 per cent (2008: 19.9 per cent).

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Spain

PERFORMANCE HIGHLIGHTS SPAIN Adjusted profit from operations % £275m Adjusted profit from operations

Spain £610m 9% Net revenue

CIGARETTE FINE CUT TOBACCO brand sales and a number of new market entrants. We launched a new brand Origenes in October 2009 to capitalise on particularly strong growth in the natural fine cut tobacco segment. In cigar, in a challenging market environment we continued to lead the market with particular strength in large cigars with our best selling brand, Farias, accounting for over 40 per cent of this category. During the year we merged the three 2009 2008 2009 2008 sales forces of Imperial Tobacco, Altadis Volumes 30.3bn 23.0bn Volumes 2,350t 1,550t cigarettes and Altadis cigars into one Market size1 83.6bn 89.6bn Market size1 5,150t 3,600t unified team, which has enabled us to deliver a more comprehensive service Market share1, 2 30.6% 30.8% Market share1 42.6% 49.1% to our customers, focusing on trade 1 Imperial Tobacco estimates. 1 Imperial Tobacco estimates. marketing excellence. 2 Market shares reflect the domestic blonde cigarette segment. Outlook We anticipate that challenging economic Market Dynamics Our Performance conditions will persist in Spain, fuelling Economic conditions have been particularly In Spain, net revenue was £610 million further downtrading. We expect that the challenging in Spain, with unemployment (2008: £411 million) and adjusted profit cigarette market will continue to decline levels at almost 20 per cent. from operations was £275 million (2008: with downtrading both within cigarettes and into fine cut tobacco. We estimate that the duty paid cigarette £150 million). The breadth of our brand and product market was down by 7 per cent to 83.6 As a result of lower travel retail sales, portfolio includes strength in value billion cigarettes (2008: 89.6 billion). due to reduced tourism in Spain and a cigarettes and fine cut tobacco, such declining dark cigarette segment, our This was mainly due to declining travel that we are well positioned to respond overall cigarette market share was down retail volumes and further downtrading to ongoing consumer shifts in the market. into fine cut tobacco. The fine cut tobacco to 36.4 per cent (2008: 37.2 per cent). sector grew strongly by 43 per cent to In the blonde cigarette segment, a slight 5,150 tonnes (2008: 3,600 tonnes). decline in Fortuna was largely offset by The Spanish cigarette market comprises further growth from Nobel and Ducados both blonde or American blend cigarettes, Rubio, with our domestic blonde cigarette which account for around 90 per cent market share at 30.6 per cent (2008: 30.8 of the market, and dark cigarettes which per cent). account for 10 per cent of the market. We increased prices in January and the Cigar market volumes were down by 5 duty increases in June were passed on per cent, impacted by the sensitivity of this to consumers in almost all cases. At the product category to economic conditions same time, we further increased the prices and restrictions on smoking in public places. of most of our cigarette brands. In June, specific taxes were increased In fine cut tobacco, we consolidated on all tobacco products. In addition, the our market leading position growing our minimum incidence of duty was increased volumes by 52 per cent. Our overall market for cigarettes and introduced on fine share was 42.6 per cent (2008: 49.1 per cut tobacco. cent), impacted by reduced travel retail

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DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Rest of EU

PERFORMANCE HIGHLIGHTS REST OF EU Adjusted profit from operations % £566m Adjusted profit from operations

Rest of EU £1,490m 19% Net revenue

CIGARETTE FINE CUT TOBACCO With the trend towards fine cut tobacco variants of cigarette brands, JPS and News grew market share in this sector. We are market leaders in the Netherlands, the largest fine cut tobacco market in the region. We made gains with our value brands Evergreen Maxx, Drum Economy and West make your own tobacco. However, downtrading has impacted our premium brands, resulting in our overall share declining slightly to 50.5 per cent 2009 2008 2009 2008 (2008: 50.7 per cent). Volumes 59.3bn 57.2bn Volumes 12,650t 14,300t We grew our cigarette share in a number of Market size1 370.4bn 386.0bn Market size1 38,800t 37,000t markets including Austria, Czech Republic, 1 1 Greece and Portugal. JPS performed well Market shares Market shares in Ireland, Portugal and Austria. Additional Austria 17.2% 16.9% Belgium 11.3% 11.9%2 cigarette brand highlights include Davidoff Belgium 16.0% 16.5% Czech Republic 49.4% 51.8% in Greece and the Czech Republic. Czech Republic 13.3% 12.2% France 23.1% 24.4% In Scandinavia, as well as growing our France2 23.9% 23.7% Greece 39.2% 41.9% cigarette shares we delivered excellent results from our snus brands Skruf and Greece 11.4% 10.9% Italy 43.9% 46.7% Knox with our overall snus volumes Ireland 25.3% 25.4%3 Netherlands 50.5% 50.7% growing by 35 per cent. Italy 2.4% 2.7% Poland 3.2% 2.0% In Central Europe as excise duties have risen Netherlands 13.1% 13.5% 1 Imperial Tobacco estimates. and consumers continue to seek value, Poland 25.7% 25.1% 2 Restated due to a change of source. demand for fine cut tobacco products has grown. We have anticipated these changing 1 Imperial Tobacco estimates. 2 Market shares reflect the domestic blonde cigarette segment. dynamics and delivered 31 per cent growth 3 Restated due to a change of source. in our volumes across the region. Our Rest of EU region comprises the EU member states plus Norway, Iceland, Liechtenstein and Switzerland. It excludes UK, Germany and Spain which are reported separately. Outlook We expect continued moderate Market Dynamics reduction in EU cross-border flows. Market cigarette volume declines and modest We estimate that regional cigarette volumes of fine cut tobacco in France were growth in fine cut tobacco, with further volumes declined by 4 per cent to 370.4 stable at an estimated 7,500 tonnes. consumer downtrading. billion cigarettes. Our Performance In this environment our versatile brands This rate of decline is mainly due to excise In the Rest of the EU, net revenue was and products, combined with our total driven price increases in Poland and in £1,490 million (2008: £1,250 million) and tobacco approach, provide future the Czech Republic which have led to adjusted profit from operations was £566 growth opportunities. growing cross-border flows. Excluding million (2008: £494 million). Our focus is on driving sales across our Poland and the Czech Republic regional In France, our domestic blonde cigarette portfolio to build on our cigarette and fine cigarette volumes were down 2 per cent. market share was up to 23.9 per cent as a cut tobacco positions. We increased prices during the year result of good performances from Gauloises including in the Netherlands, Greece and Blondes, Fortuna, JPS and News. We are Italy and in November 2009 in France. market leaders in the dark cigarette In France we estimate the cigarette market segment which continued its declining was up by 3 per cent to 55.0 billion trend, impacting our overall share which cigarettes (2008: 53.6 billion) due to a was 28.8 per cent (2008: 29.3 per cent).

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Americas

PERFORMANCE HIGHLIGHTS AMERICAS Adjusted profit from operations % £288m Adjusted profit from operations

Americas £861m 10% Net revenue

CIGARETTE FINE CUT TOBACCO realise the opportunities that our versatile multi-product portfolio offers. In cigar, trading conditions have been challenging. We have continued to perform well with our premium and natural wrapper brands but the rest of our homogenised wrapper portfolio has been under pressure and we have actively managed our cost base. The closure of our cigar factories in Florida and Alabama has been regrettable but necessary to enable us to maintain 2009 2008 2009 2008 our profitability. Americas volumes 13.8bn 15.2bn Americas volumes 650t 600t Outlook USA market size1 326.5bn 353.5bn The USA tobacco market is in a state 1 of transition following the FET increases USA market share 4.2% 4.2% but our portfolio leaves us well positioned 1 Imperial Tobacco estimates. to further grow sales in this key market. Our focus is on improving our profitability, by enhancing our cigarette presence, Market Dynamics In the fine cut tobacco market some building on our position in fine cut tobacco, while improving our competitive position The main focus of our operations in the manufacturers, including Imperial Tobacco, in our cigar business. region is the USA, where there were two have moved production to expanded important regulatory changes to the market tobacco. In cigar, current economic Given our experience of operating in during the year. conditions and the substantial FET regulated markets, we are confident of On 1 April 2009, a significant increase increases have reduced total market continuing to successfully develop our in Federal Excise Taxes (FET) was levied volumes by 7 per cent. USA business. across all tobacco products. This has Our Performance impacted the market, with consumer prices Our Americas net revenue was £861 million rising by approximately 35 per cent during (2008: £542 million) with adjusted profit 2009. Ahead of this increase, we saw from operations of £288 million (2008: wholesalers and retailers reduce their stocks £166 million). and in the second half of the year we saw increased competitor promotional activity. Our USA cigarette volumes were 12.6 billion (2008: 14.2 billion), with our The Food and Drug Administration cigarette market share stable at 4.2 per assumed regulatory control of the USA cent, a pleasing performance given current tobacco industry under the Family Smoking market challenges. Our main brands USA Prevention and Tobacco Control Act, which Gold and Sonoma continue to be well became law in June. We want to work positioned in the discount sector, with their constructively with the FDA but many of market shares at 2.4 per cent and 1.6 per the provisions within the Act violate our cent respectively and we further extended constitutional rights, and as a result we distribution of Fortuna. have joined with a number of other companies in filing an action in the Federal In fine cut tobacco, we are extending Court challenging the constitutionality our portfolio range in response to the of certain provisions of the Act. dynamic environment. We estimate the USA cigarette market We have expanded our cigarette sales declined by 8 per cent to 326.5 force, which has improved our national billion cigarettes. distribution capabilities so that we can

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DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Rest of the World

PERFORMANCE HIGHLIGHTS REST OF THE WORLD Adjusted profit from operations % £617m Rest of the Adjusted profit from operations World 21% £2,138m Net revenue

CIGARETTE FINE CUT TOBACCO In Australia, we repositioned Horizon stabilising the brand and launched JPS with positive results to date. We grew our market share in New Zealand to 18.3 per cent (2008: 17.5 per cent), with an excellent performance from JPS. In Taiwan, with our new factory now fully operational we have improved profitability and our competitive position. Despite a declining premium segment, Davidoff continued to grow volumes. Our overall 2009 2008 Our Performance market share was up to 9.9 per cent (2008: 9.7 per cent), also reflecting growth Volumes 174.1bn 154.3bn In the Rest of the World, net revenue was £2,138 million (2008: £1,502 million), from Boss in the value segment. Market shares1 with adjusted profit from operations of We also grew market share in a number 2 Australia 16.2% 17.0% £617 million (2008: £404 million). of other markets in Asia Pacific including Morocco 85.0% 87.3% We delivered strong results in Africa, in Cambodia and Laos. 2 Russia 8.6% 8.7% increasing market shares in many markets In common with most luxury goods, Saudi Arabia 9.8% 7.6%2 with Excellence and Fine continuing to our overall Habanos cigar volumes were build on their positive momentum. Taiwan 9.9% 9.7% impacted by the current economic climate resulting in both destocking and lower Turkey 3.8% 3.2% In Morocco, we consolidated our market leading position ahead of the monopoly consumption. We have mitigated this Ukraine 21.6% 21.7% in tobacco manufacture and distribution through price increases across the 1 Imperial Tobacco estimates. ending in 2010. We continued to lead the portfolio and volume gains in Asia, most 2 Restated due to change of source. market with Marquise and with uptrading of Eastern Europe and in some markets into international brands ongoing, we in Western Europe. grew market share of Gauloises Blondes. Outlook A detailed review of our Moroccan business We believe this region offers us follows on pages 29 and 30. considerable growth opportunities. In the Middle East, we grew market shares As part of the ongoing development of in all our major markets. Davidoff has our Africa and Middle East business we grown significantly across this region and have been restructuring certain distribution has benefited from a number of special arrangements in the region, which we editions. We have improved our route to Regional Review anticipate will result in a short term volume market and increased our distribution. In This diverse region offers considerable reduction but with minimal impact on addition, Gauloises Blondes has performed development opportunities given the broad Group profit. range of countries it encompasses. well, growing volumes. Strategic investments in key markets Davidoff also performed strongly across Whilst building on our strong profit base in and our focus on sustainable sales Eastern Europe achieving volume gains mature markets, we are improving sales in growth will enable us to further develop the emerging markets of our Rest of the of 16 per cent, with excellent results in Ukraine, Azerbaijan and Serbia. our business with our versatile brand and World region. As in all our markets, local product portfolio. insight is key to maintaining our growth In Russia, our market share was broadly momentum, and we continually ensure stable at 8.6 per cent, with a good that our local portfolios reflect consumer performance from Maxim and Classic. preferences in order to maximise our sales potential. In an environment of significant price increases in Ukraine, we grew market share of Classic in the value sector and Davidoff in the premium sector.

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Case Study

MOROCCO MOROCCO IS KEY TO OUR GROWTH STRATEGY IN AFRICA

Market Overview We acquired our presence in Morocco as a result Morocco is an evolving market. Consumers are increasingly uptrading from traditional of the Altadis acquisition and continue to develop dark cigarette brands, positioned in the economy or low price segments, to our operations in this important market. cigarettes in the blonde or American blend mid-price range. Total cigarette consumption is broadly stable at around 14.6 billion cigarettes and around 18 per cent of the adult population smoke. Tobacco regulation also continues to evolve. Although not yet ratified, Morocco is a member of the Framework Convention on Tobacco Control, the world’s first global tobacco treaty. 01 A new anti-tobacco law including a ban on smoking in public places, larger health warnings and advertising restrictions has recently been passed by Parliament. Legislation is also in place prohibiting price reductions and any new brands must be introduced at a price above the minimum official price. A Growing Business In 2003, Altadis acquired 80 per cent of the Moroccan Government owned tobacco business, with the remaining 20 per cent acquired in 2006. The acquisition included the exclusive right for the manufacture and distribution of tobacco products in Morocco until the end of 2010. We are market leader with a cigarette share of 85 per cent. Our key local blonde cigarette brand Marquise holds around 61 per cent share and is positioned in the economy price segment. This segment has grown in almost direct proportion to the decline in dark cigarettes which are priced in the same segment. However, as uptrading into international brands such as Fortuna and Gauloises Blondes increases, the growth in the economy segment has slowed and is starting to reverse.

01 Marquise is our key local brand and is positioned in the economy segment.

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DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Case Study continued

We expanded our portfolio with the The monopoly in distribution ends in 2010 launch of Fortuna in 2003 and Gauloises and with our market leading position we Blondes in 2004 and have since grown are positioned well to meet the demands We are market market shares to 5.0 per cent and of increased competition. leaders in 6.6 per cent respectively. Our broad product portfolio and We further strengthened our position, competitive pricing ensures that we are Morocco with extending our Moroccan portfolio with able to cover all aspects of the tobacco the launch of Davidoff in 2008 and West market enabling us to continue to take a share of in 2009 in the premium and mid-price advantage of evolving market dynamics. cigarette segments respectively. By aligning our local portfolio to evolving We have also been growing our range of consumer preferences we will seek to further other tobacco products such as cigars, enhance our profits in this key market. cigarillos and fine cut tobacco. 85 In 2003, we considerably improved our Visit www.imperial-tobacco.com % premium cigar offerings, with significant investment in developing cigar speciality for more information. outlets. In addition, we introduced mass market cigars or cigarillos and have doubled market volumes since 2003, principally led by our Fleur de Savane range. We have two factories in Morocco and a threshing plant to process locally grown tobacco, and continue to focus on enhancing our distribution and manufacturing capabilities. 02 In 2004, we introduced Gauloises Blondes and 03 In February 2009, we signed a long-term have grown our market share to 6.6%. agreement with Philip Morris International for 03 We have doubled our market volumes of mass the manufacturing, import, distribution and market cigars since 2003, principally led by our merchandising of their brands in Morocco. Fleur de Savane range. There are three primary routes to market; supermarket-style shops, van sales and truck sales which are focused on sales in rural areas. To improve efficiency, customer service and to optimise costs, we are increasingly focusing our route to market on van and truck sales and also improving our telesales operations to enhance delivery capacity and improve distribution efficiency.

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Manufacturing

01 We continue to drive improvements across our manufacturing footprint.

Our quality management systems address continual improvement. This year 30 of our 56 factories (58 per cent) were ISO 9001 certified, with projects underway to implement the standard in eight others. We are constantly looking at the processes for controlling and improving Our key priority has been integrating the Imperial our environmental performance, and apply Tobacco and Altadis operations and extending best the ISO 14001 international standard to our operations. Thirty seven of our 56 factories practice across our manufacturing footprint. (68 per cent) were ISO 14001 certified, with our factory in Taiwan the latest to achieve this standard. Outlook Our current focus is on completing our integration projects in Europe, whilst driving Integration Progress In line with our business simplification improvements across our manufacturing Our key priority during the year has been strategy, we delivered additional portfolio without compromising quality integrating the Imperial Tobacco and improvements with the number of blends and our innovation capability. In addition, Altadis manufacturing operations and decreasing by 9 per cent. we expect our productivity to improve as implementing standard systems and We have invested in our operations to the benefits of integration continue to processes throughout our 56 factories. support productivity improvements and be realised. Following an extensive review of our innovation. Investment has been focused in We are seeking to manage the impact manufacturing capacity we have progressed two main areas, in primary and secondary of increasing leaf costs, which are being a number of European restructuring initiatives processing and in our supply chain to support driven by underlying pricing pressure to improve our competitive position and flexibility, process standardisation, and the and the currency translation impact of a address the significant overlap in our continued delivery of our synergy targets. commodity priced primarily in US dollars. operations following the Altadis acquisition. In January, our factory in Taiwan started We operate in a dynamic, competitive In addition, we have strengthened our full production. Our ability to manufacture industry and constantly keep our USA cigar business by closing our factories in market is contributing to the continued operations under review. in Alabama and Florida. development of our value portfolio. We reallocate and re-use our surplus In Germany, to support increased capacity manufacturing equipment within the at our Langenhagen factory we have begun Group, giving benefits on product quality, the construction of a warehouse and overheads, productivity and waste reduction. secondary extension. Our Performance In addition, in Reidsville, North Carolina, We have been focused on reducing our the upgrading of our cigarette and fine working capital across our manufacturing cut tobacco facilities acquired with operations, and have delivered further Commonwealth Brands is also cost savings. nearing completion.

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DIRECTORS’ REPORT: BUSINESS REVIEW: OPERATING REVIEW Logistics

LOGISTICS Adjusted profit from operations %

01 02

01 Our logistics business is one of the largest of its kind in Europe. 02 We deliver to around 300,000 outlets across Europe.

PERFORMANCE HIGHLIGHTS our pharma division, where we are increasing our services to our current customers and focusing on distribution £964m £177m 18.4% to pharmacies. We have been able to largely offset the Distribution Adjusted Adjusted impact of economic conditions through fees proﬁt from distribution the successful implementation of cost operations margin saving initiatives. Outlook Our logistics business is highly cash generative and we remain focused on maintaining profits in challenging market conditions. We are exploring a number of further cost saving initiatives and are further increasing Overview We delivered a good performance in France our focus on our core profitable operations. Our logistics business is one of the largest with results ahead of our expectations. of its kind in Europe, delivering to around In addition, we recently renewed our 300,000 outlets across Europe. French contracts with British American Tobacco and Japan Tobacco International. It is divided into two segments: Tobacco Logistics and Other Logistics. In Spain, despite market volume declines, our results benefited from price increases Tobacco Logistics delivers products for in January and June. We have also the international manufacturers, including renewed our distribution contract with Imperial Tobacco, to tobacconists and Philip Morris International. other sales outlets. The business is run on an operationally neutral basis ensuring all In our Other Logistics business current customers are treated equally. We have in economic conditions have made trading excess of 90 per cent market share in the conditions challenging and we have distribution of tobacco in Spain, France focused on maintaining our profitability. and Italy. We are rationalising our Other Logistics Other Logistics provides specialised services operations whilst looking for further for clients in the pharmaceutical, publishing, opportunities to profitably leverage our transportation and telecommunications logistics expertise. industries, as well as general transport and In Spain, Logista recently formed a joint courier services, principally in Spain, Portugal venture with a gaming company to provide and France. a range of services to support one of the Our Performance Spanish lotteries, including distribution Distribution fees were £964 million (2008: and marketing. The contract runs until 2020 £607 million), with adjusted profit from and will significantly extend the lottery’s point operations £177 million (2008: £121 million). of sale network and improve our profits. Our Tobacco Logistics business has We have increased our market shares in been resilient in spite of volume declines. our French wholesale operations and within

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02 3 GOVERNANCE

In this section: 34 Chairman’s Introduction 36 Board of Directors 38 Chief Executive’s Committee 39 Corporate Governance Report 50 Directors’ Report: Other Information 55 Directors’ Remuneration Report

Our Total Tobacco Portfolio 01 Through Habanos, our Cuban joint venture, we have a number of prestigious cigar brands including Montecristo. 02 We have grown our snus volumes by 35 per cent with a strong performance from Skruf. 03 We are world leader in cigars with sales in more than 120 countries.

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DIRECTORS’ REPORT: BUSINESS REVIEW: GOVERNANCE Chairman’s Introduction

HIGH STANDARDS OF CORPORATE GOVERNANCE SUPPORT OUR STRATEGY

Iain Napier Chairman The current difficulties facing the global economy have brought considerable focus on governance and companies’ remuneration policies. We are confident that our long established and embedded Corporate Governance practices, internal controls and remuneration policy, which in principle comply with the recommendations in the Walker Review, support our strategy of creating sustainable shareholder value and ensure that we “We recognise it is critical to remain in a position to deliver this strategy. constantly review and manage our Our Corporate Structure Explained During the year we made considerable progress with the governance processes to ensure integration of Altadis into our corporate structure. Following this our long-term sustainability.” integration we have two main business activities: tobacco and logistics. Our tobacco segment comprises the manufacture, marketing and sale of tobacco and tobacco-related products. Our logistics segment comprises the distribution of tobacco products for major tobacco manufacturers, including Imperial Tobacco, as well as a wide range of non-tobacco products and services. ACHIEVEMENTS IN 2009: Both business segments are managed within our Corporate – Appointment of Chief Operating Officer Governance framework and are subject to our policies and control procedures. However, we run our logistics segment on an – Considerable Progress with Integration operationally neutral basis in order to ensure that all its customers – Refining Corporate Strategy are treated equally. How We Actively Manage Our Business – Development of the Risk Co-ordination Committee Our Executive Directors have a wealth of experience in the tobacco – Significant Refinancing industry, complemented and supplemented by the wide range of business and financial experience of our Non-Executive Directors. – Compliance with the Continuing Implementation They are collectively responsible to our stakeholders for ensuring of the Companies Act 2006 the Group is managed within its governance framework, setting our corporate strategy and providing an environment in which the corporate strategy can be delivered. PRIORITIES FOR 2010: Our corporate strategy is supported by our remuneration policy – Management Succession which focuses on performance related reward, with long-term – Further Progress on Integration targets designed to incentivise the creation of sustainable shareholder value. Performance against our corporate strategy – Ongoing Enhancement of our Risk Management is further incentivised by our annual bonus and other performance Processes led by the Risk Co-ordination Committee targets which support our key performance indicators (page 14) and the management of the key strategic risks of the business. – Enhancement of our Anti-illicit Trade Activities Managing Risk – Further Embedding and Enhancing Internal Controls The Group faces a number of risks, similar to those faced by many multinational companies, which may impact on our financial position or prevent us from achieving our corporate strategy. Successful management of these risks is fundamental to our sustainable profitability and future growth.

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Our business and the risks we face are constantly changing. Key Priorities for 2010 We, therefore, regularly review our policies and risk management In addition to our ongoing management succession planning, procedures to ensure they are up-to-date and continue to protect our priorities for 2010 include further consolidation of the Altadis our stakeholders. business and the continued embedding and enhancement of our processes and internal controls in the wider Group, It is impossible to eliminate every risk. However, through our including in relation to Occupational Health, Safety and Risk Co-ordination Committee we analyse risks by reference to Environmental processes. the likelihood of them occurring and their potential impact. This ‘top down’ process supports our long established risk management We will also focus on further enhancement of our risk controls embedded across the business. Further information management and anti-illicit trade processes. relating to the management of risk during the year is set out Our governance processes support and underpin our strategy on pages 45 to 48. and its underlying objectives of sales growth, cost optimisation We also encourage staff to raise concerns they may have including and cash utilisation, and we will continue to drive these during anything they believe to be wrong or dangerous. Our Public Interest the year. We will also continue to support reasonable regulation Disclosure Policy allows employees to do this safe in the knowledge of tobacco products but will challenge regulation that undermines that they will not suffer any detriment as a consequence. the principles of adult choice and the freedom of competition. Succession Planning We regularly review the composition of the Board and the Chief Executive’s Committee to ensure a continuous provision of the most effective leadership for the Group’s development and sustainability. Iain Napier Our annual talent review process is designed to identify the most Chairman capable successors for critical roles at all levels in our business. It is a bottom up process initiated by our major market management teams and rolled up through our regions and business units. This culminates in a final talent review meeting conducted by the Chief Executive’s Committee, the outputs of which are presented to the Board for review and challenge. This is a practice that is embedded across the Group and seeks to ensure a continuous talent pipeline. Key Achievements in 2009 As a further step in ensuring our Board structure is aligned with the ongoing international development of our enlarged business, Mrs A J Cooper was appointed to the position of Chief Operating Officer in March 2009. We made considerable progress with the integration of Altadis, including rolling out our internal controls and Group policies and procedures. In addition, we refined our corporate strategy to ensure we capitalise on the opportunities offered by the enlarged business. To ensure that maturing financing facilities were effectively managed we successfully raised £3.9 billion through the capital markets and have no refinancing requirements until July 2012.

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DIRECTORS’ REPORT: GOVERNANCE IAIN NAPIER, FCMA GRAHAM BLASHILL, BSC Board of Directors

Title and age Chairman, 60 Group Sales and Marketing Director, 62 Appointment Appointed Chairman in January 2007. Appointed to the Board in October 2005. Non-Executive Director from March 2000. Committee Chairman of Nominations Committee. Chief Executive’s Committee. membership

Skills and Iain was formerly main Board Director of Bass PLC, Graham is responsible for global sales and marketing The Board of experience Chief Executive of Bass Leisure and then of Bass activities. With over 40 years’ experience with the Brewers and Bass International Brewers. He was then Group he has held a number of senior sales and Vice President UK and Ireland for Interbrew SA until marketing positions, including Managing Director Directors is our August 2001. He was Chief Executive of Taylor UK and Regional Director for Western Europe. Woodrow International Housing and Development from principal decision 2001 to 2005 and was previously Director of Collins Stewart PLC. making forum and External Non-Executive Chairman of McBride PLC and a No external Director appointments. appointments Non-Executive Director of Molson Coors Brewing manages overall Company, John Menzies plc and William Grant & Sons control of the Holdings Limited. business. GARETH DAVIS, BA ALISON COOPER, BSC, ACA Our Board focuses on areas that are important to shareholders – strategy, risk management, operational performance, leadership development and regulatory matters. The Board and each committee are subject to Title and age Chief Executive, 59 Chief Operating Officer, 43 annual independent Appointment Appointed Chief Executive on demerger in 1996. Appointed to the Board in July 2007. performance evaluation. Committee Chief Executive’s Committee. Chief Executive’s Committee. membership

Visit www.imperial- Skills and Gareth led the successful demerger from Hanson Alison was appointed Chief Operating Officer in March tobacco.com for experience and subsequent listings on the London and New York 2009. She has responsibility for sales and marketing, more information. Stock Exchanges. With 37 years’ experience across manufacturing, the cigar business and corporate all aspects of the Company, he has played a key role development, which includes strategic planning, business in the development and execution of the Group’s development, corporate affairs and is responsible for the strategy and its development into one of the world’s integration of Altadis. Alison joined the Group in 1999 and leading multinational tobacco businesses. Gareth will has held a number of senior roles including Director of be retiring on 12 May 2010 and will be succeeded by Finance and Planning, Regional Director Western Europe our current Chief Operating Officer, Alison Cooper. and Corporate Development Director. Previously she was with PricewaterhouseCoopers. Alison will succeed Gareth Davis as Chief Executive with effect from 13 May 2010. External Non-Executive Director, Wolseley plc since 2003. Non-Executive Director, Inchcape PLC since appointments Senior Independent Director, Wolseley plc since 2004. 1 July 2009.

ROBERT DYRBUS, BSC, FCA JEAN-DOMINIQUE COMOLLI

Title and age Finance Director, 57 Non-Executive Deputy Chairman, 61 Appointment Appointed Finance Director on demerger in 1996. Appointed Non-Executive Deputy Chairman in July 2008. Committee Chief Executive’s Committee. Nominations Committee. membership Skills and Robert was Finance Director of Imperial Tobacco Jean-Dominique has held a number of senior positions experience Limited from November 1989 and one of the in the French Civil Service including Assistant Principal three-man Hanson team involved in the strategic Private Secretary to the Minister of the Economy reorganisation of the Group. Since then he has and Principal Private Secretary to the Budget Minister, played an integral part in shaping the strategic before his appointment as Director General of Customs direction of the Group. at the Budget Ministry in 1989. In 1993 he was appointed Chairman and Chief Executive of SEITA and in 1999 appointed as Co-Chairman of the Altadis Group, a position he held until 2005, when he was appointed Chairman of Altadis.

External No external Director appointments. Non-Executive Director of Pernod-Ricard, appointments Non-Executive Director of Casino Group, Non-Executive Director of Calyon and Non-Executive Director of Public Establishment of Opéra Comique.

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PIERRE JUNGELS, CBE (HON), CHARLES KNOTT, FCMA MARK WILLIAMSON, CA (SA) C ENG, PHD

Senior Independent Non-Executive Director, 65 Non-Executive Director, 54 Non-Executive Director, 51 Appointed Non-Executive Director in August 2002. Appointed Non-Executive Director in April 2006. Appointed Non-Executive Director in July 2007.

Chairman of the Remuneration Committee and Nominations Committee, Audit Committee and Chairman of Audit Committee; Member of the Member of the Nominations Committee and the Remuneration Committee. Nominations Committee and Remuneration Committee. Audit Committee. Pierre has held numerous senior international Charles was a Director of ICI plc from 2004 to 2007, Mark has considerable international financial and positions within the oil industry with Shell International, Chairman and Chief Executive of Quest International, general management experience. He joined Petrofina SA and British Gas PLC. He became CEO ICI’s flavours and fragrances business. He previously International Power in 2000 as Group Financial of Enterprise Oil in 1996, leading the business to fulfilled a variety of international assignments as Controller and was appointed to the Board as Chief substantial geographic and financial growth until a long-term executive at National Starch, a Unilever Financial Officer in 2003. Previously, he was Group retirement in November 2001. company until 1997. Currently, Chief Executive Officer Financial Controller and Group Chief Accountant at of Flint Group. Simon Group, the engineering and bulk chemicals storage group. Chairman of Oxford Catalyst Group PLC, Director Chairman and Chief Executive Officer of Flint Group Serves on the Board of International Power plc. of Baker Hughes Inc., Chairman of Rockhopper Holdings S.à.r.l. Exploration PLC and a Non-Executive Director of Woodside Petroleum Ltd. KEN BURNETT, MA, MBA, PHD SUSAN MURRAY MATTHEW PHILLIPS, LLB

Non-Executive Director, 57 Non-Executive Director, 52 General Counsel and Company Secretary, 39 Appointed Non-Executive Director in April 2006. Appointed Non-Executive Director in December 2004. Appointed Company Secretary in October 2004. Nominations Committee. Nominations Committee, Audit Committee and Chairman of the Disclosure Committee, Chairman Remuneration Committee. of the Risk Co-ordination Committee, Secretary to and Member of the Chief Executive’s Committee; Secretary to the Board and to the Audit, Nominations and Remuneration Committees. Ken was President, Asia Pacific of Allied Domecq from Susan was a Board member at Littlewoods Limited Matthew joined Imperial Tobacco’s legal department 1996 until its acquisition by Pernod Ricard in 2005. from October 1998 until January 2004, latterly as in 2000 and was closely involved in the acquisitions Prior to joining Allied Domecq, he held senior Chief Executive of Littlewoods Stores Limited. Prior of Reemtsma and Altadis. Previously he worked for management positions in the Asia Pacific region to this she was worldwide President and Chief law firms Linklaters and Burges Salmon. with Seagram, Interbrew and International Distillers Executive of The Pierre Smirnoff Company, part & Vintners Ltd (now part of Diageo plc). of Diageo plc. Susan is also a former Non-Executive Director of SSL International plc, Aberdeen Asset Management PLC and a former council member of the Advertising Standards Authority.

Director of K-Energy Pty Limited. Non-Executive Director of Enterprise Inns Plc, Wm No external Director appointments. Morrison Supermarkets plc and Compass Group PLC. Also fellow of the Royal Society of Arts. MICHAEL HERLIHY, MA BERGE SETRAKIAN (OXON), SOLICITOR

Non-Executive Director, 56 Non-Executive Director, 60 Appointed Non-Executive Director in July 2007. Appointed Non-Executive Director in June 2008. Nominations Committee, Audit Committee and Nominations Committee. Remuneration Committee. Michael was formerly General Counsel and Head Berge is a senior partner in the law firm Dewey of Mergers and Acquisitions for ICI PLC with overall & LeBoeuf LLP and has extensive expertise in responsibility for corporate acquisitions and international transactions. He was a Non-Executive divestments and has extensive experience of both Director of Altadis, S.A. having been appointed in May private and public market transactions. 2004 and was a Non-Executive Director of Investcom, a telecommunications company which was acquired in 2006 by MTN, a Johannesburg-based company. Berge is currently the Executive Chairman and CEO of AGBU, the largest philanthropic Armenian organisation in the world. He also serves as a Non-Executive Director on various not-for-profit organisations. Serves on the Board of Compass Partners Non-Executive Director of Interaudi Bank of New York, International LLP and is currently General Counsel Executive Chairman and CEO of AGBU, Non-Executive for Smiths Group plc. Director of The Morganti Group, Inc.

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DIRECTORS’ REPORT: GOVERNANCE Chief Executive’s Committee To ensure our strategy is effectively implemented the Chief Executive’s Committee, comprising the Executive Directors, Company Secretary and the following executives, manages the day-to-day operation of the business.

GARY ALDRIDGE, MBA KATHRYN TURNER

Title and age Manufacturing Director, 56 Group Human Resources Director, 54 Appointment Appointed Manufacturing Director in January 2008. Appointed Group Human Resources Director in 2002. Committee Chief Executive’s Committee. Chief Executive’s Committee. membership

Skills and Gary was Regional Operations Director Far East, Eastern Europe, Kathryn is responsible for all aspects of human resource experience Africa and Middle East. Previously, he was Director of Operations, management across the Group. She joined in 2002 from Central and Eastern Europe. He held a number of senior Somerfield PLC, where she was a member of the PLC Board. manufacturing roles in RJ Reynolds International before joining She has also held a number of senior operational consulting Reemtsma in 2001. roles in change management in the FMCG sector.

External No external Director appointments. No external Director appointments. appointments

FERNANDO DOMÍNGUEZ, IE

Title and age Chief Operating Officer Cigar Business Unit, 50 Appointment Appointed Chief Operating Officer Cigar Business Unit in June 2008. Committee Chief Executive’s Committee. membership

Skills and Fernando is Chief Operating Officer Cigar, responsible for the experience Cigar Business of the Imperial Tobacco Group. With an industrial engineering background he joined Tabacalera in 1985. Fernando has held numerous senior positions within both Tabacalera and the Altadis Group, mainly in the Cigar Division. He was Co-Chairman at Corporación Habanos, S.A. before his appointment as Chief Operating Officer Cigar Business Unit in May 2005.

External No external Director appointments. appointments

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Corporate Governance Report

We remain committed to maintaining high standards of corporate governance, which we see as the cornerstone of managing the business affairs of the Group and a fundamental part of the Board discharging its stewardship responsibilities.

Introduction The Board recognises that it is accountable to shareholders for our standards of governance. This report, together with the Directors’ Remuneration Report, seeks to explain how in practice we apply the principles of good governance, advocated by the Combined Code on Corporate Governance (the Code). The Code sets out governance rules and best practice provisions which apply to UK listed companies. Companies must either comply with these provisions or provide an explanation for areas of non-compliance. The Code is publicly available on the Financial Reporting Council’s website www.frc.org.uk. It is the Board’s view that the Company has been fully compliant with the Code throughout our 2008/2009 financial year.

HOW WE MEET OUR GOVERNANCE RESPONSIBILITIES IN PRACTICE

A. Directors B. Remuneration 1 The Board: How do we ensure the Company 1 The level and make-up of remuneration: What is is headed by an effective, collectively our approach to remuneration and how do we link responsible Board? it to performance? 2 Chairman and Chief Executive: How do we ensure 2 Procedure: What is our formal procedure for no one individual has unfettered powers of decision? developing our policy on executive remuneration? 3 Board balance and independence: How do we ensure a sensible balance of Executive and C. Accountability and audit Non-Executive Directors? 1 Financial reporting: How do we ensure we 4 Appointments to the Board: How rigorous is our present a clear and balanced assessment of the procedure for the appointment of new directors to Company’s position? the Board? 2 Internal control: What does our Board do to maintain 5 Information and professional development: How do a sound system of internal control? we induct and regularly inform our Board? 3 Audit Committee and Auditors: How do we formally 6 Performance evaluation: How do we formally evaluate apply financial reporting and internal control principles? our Board and Committees’ performance annually? 7 Re-election: How do we ensure planned and D. Relations with shareholders progressive refreshing of the Board? 1 Dialogue with institutional shareholders: How does our Board ensure that a satisfactory dialogue with shareholders takes place? 2 Constructive use of the AGM: How does the Board effectively use the AGM to engage with investors?

IMPERIAL TOBACCO GROUP PLC 2009 39 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

MANAGEMENT AND CORPORATE STRUCTURE

BOARD

CHAIRMAN AND REMUNERATION NOMINATIONS AUDIT NON-EXECUTIVE COMMITTEE COMMITTEE COMMITTEE DIRECTORS

CHIEF EXECUTIVE AND EXECUTIVE DIRECTORS DISCLOSURE COMMITTEE

CHIEF EXECUTIVE’S COMMITTEE RISK CO-ORDINATION COMMITTEE

our Non-Executive Directors play a valuable role by critically A. Directors reviewing and, where appropriate, challenging strategies proposed 1 The Board: How do we ensure the by management to further develop our business, effectively use our resources and our standards of conduct. This ensures we act Company is headed by an effective, in the best long-term interests of our shareholders, while taking collectively responsible Board? account of the wider community of interests represented by our employees, customers and suppliers. Where appropriate, papers Board and Board Committees presented to our Board cover environmental, community, ethical Board Structure The Board met six times during the year (with two of the meetings and reputational issues, thereby fully integrating them into our having a duration of two days) and is scheduled to meet five times decision making and risk assessment processes. in the 2010 financial year. HOW THE BOARD SPENDS ITS TIME Our Directors for the year to 30 September 2009 are shown on pages 36 and 37. Their biographies demonstrate a detailed Strategy knowledge of the tobacco industry and the wider fast moving Performance consumer goods (FMCG) sector. This is supported with a wide Financing range of international business and financial experience which is Governance/OHSE Integration vital to our ongoing development and long-term sustainability. Their Other biographies also include details of any other major directorships. Board Operations The Board is our principal decision making forum and manages overall control of the Group’s affairs. Key to this control is the schedule of matters on which the Board alone may make decisions. These include approving our commercial strategy, corporate plans, major corporate activities and our financial statements, together with dividends. In addition, it is only the Board who can appoint During the year matters considered by the Board included the and remove Directors and our Company Secretary. evolving strategic direction of the business, review of Group funding arrangements (specifically refinancing through Bond To ensure the effective operation of our Board, the Company issues), the change in role of Mrs A J Cooper to Chief Operating Secretary provides advice on all governance and regulatory Officer, the potential effect of the recession including mitigating matters. He also assists the Chairman and Chief Executive recessionary pressures and the ongoing integration of the in setting the agenda for Board meetings. Altadis business. At its June 2009 meeting, Senior managers from across the DIRECTOR INDUSTRY BACKGROUND/EXPERIENCE business presented to the Board on key strategic issues. Tobacco During the year the Board also considered and approved Manufacturing annual and medium-term plans and operating results. FMCG Legal By reviewing the Group’s results at each Board meeting we Energy ensure Board members are kept informed on our progress. Between Board meetings, Board members are supplied with monthly performance reports, including detailed commentary and analysis. To ensure Board members are fully informed on all Committee matters they receive reports and minutes from the chairmen of the Board Committees. Our Non-Executive Directors also meet regularly, outside of scheduled Board meetings. The main item discussed at such meetings during the year was succession planning. All Directors are equally accountable to our shareholders for Our Non-Executive Directors play a key role in corporate the proper stewardship of our affairs and the success of the accountability and governance through their membership of the Company. By using their judgement, experience and independence, Board Committees. The membership and remit of each Committee

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STRUCTURE OF THE BOARD AND BOARD COMMITTEES

REMUNERATION NOMINATIONS AUDIT BOARD COMMITTEE COMMITTEE COMMITTEE

Iain Napier, Robert Dyrbus Pierre Jungels, Iain Napier, Susan Murray Mark Williamson, Chairman Michael Herlihy Chairman Chairman Berge Setrakian Chairman Gareth Davis Pierre Jungels Michael Herlihy Bruno Bich Mark Williamson Michael Herlihy (to 16 September 2009) Jean-Dominique Charles Knott Charles Knott Pierre Jungels Comolli Susan Murray Susan Murray Ken Burnett Matthew Phillips Charles Knott (Secretary) Bruno Bich Berge Setrakian Iain Napier Jean-Dominique Susan Murray (to 16 September 2009) Comolli Mark Williamson (to 7 September 2009) Graham Blashill Mark Williamson Michael Herlihy Matthew Phillips Ken Burnett Matthew Phillips Pierre Jungels (Secretary) Alison Cooper (Secretary) Matthew Phillips Charles Knott (Secretary)

Chief Executive’s Committee As part of the Group’s policy of annual review, the terms of reference To ensure the effective implementation of Group strategy and for each of these Committees were reviewed and, where necessary, policy our Board delegates authority of the day-to-day operation updated during the year and are published on our website, of the business to our Chief Executive and Chief Executive’s www.imperial-tobacco.com. They are also available from the Committee. This delegation is, however, subject to the schedule Company Secretary. of matters on which the Board alone can decide and those which can only be decided by our shareholders. The Committee, which met 20 times during the year, comprises are considered below, together with a record of each Director’s the Executive Directors, the Manufacturing Director, the Chief attendance at Board and Committee meetings during the year. Operating Officer Cigar, the Group Human Resources Director, To ensure Directors are kept up-to-date on developing issues and to together with the Company Secretary. enhance the overall effectiveness of the Board and its Committees, In addition to implementing our strategy, the Committee oversees our Chairman and chairmen of the Committees communicate all the Group’s activities, forecasts, policies and operations, to regularly with the Chief Executive and other members of the Chief ensure that the use and level of the Group’s resources are optimised Executive’s Committee on an ongoing basis. and effectively managed. As part of this ongoing review process In order for our Directors to fulfil their duties they can seek both the Committee develops and recommends to the Board any independent professional advice, at our expense, and the advice changes in strategy to enable us to achieve our overall objective and services of the Company Secretary and other employees. of creating sustainable shareholder value.

MEETINGS OF THE BOARD, BOARD COMMITTEES AND SHAREHOLDERS Audit Remuneration Nominations Annual Board Committee Committee Committee General Meeting Total number of meetings in Financial Year 2009 63411 Number of meetings attended in Financial Year 2009 Executive Directors Mr G Davis 6/6 –––1/1 Mr R Dyrbus 6/6 –––1/1 Mr G L Blashill 6/6 –––1/1 Mrs A J Cooper1 5/5 –––1/1 Non-Executive Directors Mr I J G Napier2 6/6 – 4/4 1/1 1/1 Mr B F Bich3 5/6 ––1/1 1/1 Dr K M Burnett 6/6 ––1/1 1/1 Mr J-D Comolli 6/6 ––1/1 1/1 Mr M H C Herlihy 6/6 3/3 4/4 1/1 1/1 Dr P H Jungels 6/6 3/3 4/4 1/1 1/1 Mr C F Knott 5/6 3/3 3/4 0/1 1/1 Ms S E Murray 6/6 3/3 4/4 1/1 1/1 Mr B Setrakian 5/6 ––0/1 1/1 Mr M D Williamson 6/6 3/3 4/4 1/1 1/1

1 Mrs Cooper was not eligible to attend one Board meeting which related to her appointment as Chief Operating Officer. 2 Mr Napier stepped down from the Remuneration Committee on 7 September 2009. 3 Mr Bich resigned from the Board on 16 September 2009. The maximum number of meetings for each individual Director is the number which they were eligible to attend.

IMPERIAL TOBACCO GROUP PLC 2009 41 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

2 Chairman and Chief Executive: How do Mr Comolli is our Deputy Chairman and Dr P H Jungels is we ensure no one individual has unfettered our Senior Independent Non-Executive Director to whom we encourage shareholders to raise any concerns. powers of decision? Following its annual evaluation (page 43) and review of potential Our Chairman and Chief Executive have clearly defined and conflicts of interest, the Board concluded at its meeting in separate responsibilities, however, they retain a close working September 2009 that all our Non-Executive Directors continue relationship and meet regularly between formal Board meetings to contribute effectively and constructively to Board debate. They to ensure a full understanding of evolving issues and facilitate also continue to challenge effectively and question management swift decision making. They are responsible to our shareholders objectively and robustly and at all times have the best interests for the successful and profitable delivery of our strategy. of our stakeholders in mind. We, therefore, confirm that, with the Our Chairman is responsible for the effective leadership of the exception of Mr Comolli and our Chairman (as required by the Board, ensuring all Directors are able to fully contribute to Code) our Directors remain independent as defined in the Code. discussions and we benefit from their wide range of skills and In compliance with the provisions of the Companies Act 2006 experience. Supported by the Deputy Chairman and Senior (the Act) relating to Conflicts of Interest, revised Articles of Independent Non-Executive Director, he is also responsible for Association were adopted at our Annual General Meeting ensuring effective communication with shareholders and ensuring (AGM) in January 2008. These provisions became effective they can raise any concerns. on 1 October 2008. Our Chief Executive, supported by the Chief Executive’s These Articles of Association allow the Board to authorise Committee, is responsible for the day-to-day leadership of situations in which a Director has, or may have, a direct or the Group and ensuring the successful implementation of the indirect interest that conflicts or may conflict with the interests strategies and objectives set by the Board. of the Company. These are known as situational conflicts. BALANCE OF EXECUTIVE AND The Act also requires Directors to declare any interest in a NON-EXECUTIVE DIRECTORS proposed transaction or arrangement with the Company. These are known as transactional conflicts. Executives Non-executives Our procedures require Directors to give notice of any potential situational and/or transactional conflicts. This includes prior approval of external directorships. Any notifications are considered at the next Board meeting and, if considered appropriate, authorised. We do not let any Director participate in the discussion, or vote regarding their own conflicts. If authorised, any conflicts are entered in our Conflicts Register. We reviewed and reconsidered all conflicts entered in our Conflicts Register at our Board meeting in September 2009. We intend to perform this review and reconsideration annually. This process allows the Board to be satisfied there is no 3 Board balance and independence: compromise to the independence of those Directors who have board appointments or relationships with companies outside the How do we ensure a sensible balance of Group. In order to underpin his independence, we entered into Executive and Non-Executive Directors? an agreement with Mr B Setrakian on 25 June 2008 to minimise the risk of any conflict of interest between, inter alia, the law firm We see having a Board with the right skill set as vital to our Dewey & LeBoeuf LLP, of which he is a partner, and the Company. ongoing success and expansion. Our Executive Directors are all Following a review of compliance with the terms of the agreement experts in their specific roles and, in addition, have a wealth of the Board confirms his ongoing independence. experience in the wider tobacco industry. This is complemented and supplemented by the wide range of business and financial experience of our Non-Executive Directors who have been appointed to bring specific skills to the Board, for example their expertise within the wider FMCG sector, financial and legal expertise and, as we expand geographically, specific regional knowledge. We believe the Board is well balanced and, notwithstanding the resignation of Mr B F Bich, remains appropriately constituted. The Board currently has 13 Directors: our Non-Executive Chairman, four Executive Directors, seven independent Non-Executive Directors and one Non-Executive Director (Mr J-D Comolli) who we do not classify as independent when determining the composition of our Board and its Committees. We do not classify Mr Comolli, for the purposes of the Code, as independent due to his ongoing Chairmanships of certain subsidiaries within our Group and his provision of certain consultancy services to us. Mr Comolli will cease to provide consultancy services to us with effect from the end of the 2009/2010 financial year.

42 IMPERIAL TOBACCO GROUP PLC 2009 1849 Black Sun ImpTob p38_p54:Layout 1 1/12/09 13:30 Page 43 NOMINATIONS COMMITTEE The Committee’s terms of reference are published on our website, www.imperial-tobacco.com

5 Information and professional Iain Napier development: How do we induct and Chairman regularly inform our Board? We have a detailed induction and briefing programme for 4 Appointments to the Board: Directors on appointment to the Board. We tailor this programme How rigorous is our procedure for the to each Director’s needs taking into account their individual qualifications and experience. appointment of new directors to the Board? For example, Mr B Setrakian’s induction programme, completed during the year, included meetings with our advisers and key employees from our major functions together with site visits. Members These meetings also included briefings on corporate responsibility Mr I J G Napier Mr C F Knott and corporate affairs issues, legal matters, product stewardship, (Chairman) Ms S E Murray environmental management, social impact, scientific and Mr B F Bich Mr B Setrakian regulatory affairs and commercial risk management. (resigned 16 September 2009) Mr M D Williamson Dr K M Burnett Ongoing training is available to all Directors to meet their individual Mr M R Phillips Mr J-D Comolli (Company Secretary, acts as needs. We also provide regular briefings to Directors on relevant Mr M H C Herlihy Secretary to the Committee) issues such as legislation and regulation changes and corporate Dr P H Jungels governance developments. For example, during the year our Auditors gave a presentation to the Board in respect of fraud Overview and corruption risk. The Nominations Committee comprises all our Non-Executive During our September 2009 Board meeting Directors visited our Directors and meets as required. During the financial year the Logistics operations in Spain where they met senior managers Committee met once. We evaluated the performance of the and received detailed presentations on our Logistics business. Committee as part of the Board performance evaluation process. The Audit and Remuneration Committees also received Responsibilities briefings from our Auditors, PricewaterhouseCoopers LLP, The responsibilities of the Committee include: and remuneration adviser Hewitt New Bridge Street respectively – the evaluation of the balance of skills, knowledge and to ensure they remain up-to-date with current regulations experience of our Board; and developments. – the development of role specifications; 6 Performance evaluation: How do – the formulation of succession plans; and we formally evaluate our Board and – the making of recommendations to the Board with regard Committees’ performance annually? to the appointment of Directors. During the year, with the assistance of an external consultant, our How the Nominations Committee Met its Responsibilities Board formally reviewed and evaluated its performance, together During the Year with the performance of its Committees and individual Directors. In addition to the Nominations Committee’s formal meeting, which Feedback from each Director was obtained through detailed recommended to the Board the appointment of Mrs A J Cooper questionnaires which were used as the basis for the overall to the position of Chief Operating Officer, the Non-Executive evaluation of the Board and its Committees and feedback Directors held a number of meetings and discussions during discussions between each Director and the Chairman. The results the year concerning Board succession planning. were discussed by the Board at its meeting in September 2009. Board Changes Our Senior Independent Director met with the Non-Executive We continually review the composition and balance of our Board Directors and the Board, without the Chairman present, to to ensure that we have the right structure, skills and expertise in consider the performance of the Chairman. place for the effective management of our multinational business. After taking account of the results of the Chairman’s formal This has been particularly important following the Altadis performance evaluation our Senior Independent Director provided acquisition in January 2008. feedback to the Chairman on a one-to-one basis. Following approval by our Board on 24 March 2009, Mrs AJCooper was appointed to the new role of Chief Operating Officer. Mrs Cooper’s appointment to this role is a further step in ensuring that our Board structure is aligned with our ongoing international “We are confident in development and by focusing on driving the operational performance the strength of our and strategic direction of the business will enhance our long-term future growth potential. internal controls.” On 16 September 2009 our Board accepted Mr B F Bich’s Iain Napier resignation as a consequence of his overall business commitments.

IMPERIAL TOBACCO GROUP PLC 2009 43 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

TENURE OF DIRECTORS

> 8 years 5-8 years 3-4 years 1-2 years

The Chairman held meetings exclusively with the Non-Executive Mr J-D Comolli, Mr R Dyrbus, Mr C F Knott and Mr I J G Napier Directors to consider, amongst other things, succession issues stand for re-election at our 2010 AGM. and the performance of the Executive Directors. In order to facilitate smooth Board refreshment our Nominations Informed by the evaluation and these reviews the Board and its Committee regularly reviews the composition, skill set and balance Committees are satisfied they are operating and performing of our Board, together with the length of service of each Director effectively. There were no significant issues or training needs and thereby identifies the skills required of future directors. identified and the process confirmed that each of our current Directors has sufficient time, knowledge and commitment to contribute effectively to our Board and its Committees. B. Remuneration The key theme which emerged from this year’s evaluation was 1 The level and make-up of remuneration: the introduction of the Risk Coordination Committee, which has What is our approach to remuneration and strengthened our Board’s confidence in our internal controls and how do we link it to performance? risk management processes. The Committee provides a more structured and formal approach to risk identification and We ensure that our remuneration policy drives our employees management which is appropriate given the nature of the to enhance our performance by focusing remuneration towards business and the current economic climate. long-term performance and providing employees with the The key theme identified as requiring ongoing Board attention opportunity to participate in our bonus arrangements and share is management succession planning. In order to assist with plans. Our overall policy is to provide remuneration at the median Executive Director succession planning, senior managers attend level of our comparator group and provide executives with the a number of strategy days, Board meetings and Board dinners. opportunity to earn upper quartile total compensation on Succession planning was also discussed at Non-Executive achievement of superior business performance. Director meetings held during the year. Our Remuneration Report, on pages 55 to 70, approved by our Following the 2008 Board evaluation, and to further enhance the Remuneration Committee and Board, outlines our remuneration independence of our Remuneration Committee, we added a strategy and policy and its links to our key performance indicators. standing item to the Committee’s agenda allowing the members The Report details the Committee’s activities over the financial of the Committee to meet without the Company Chairman, any year and contains full details of Directors’ emoluments. Executive Director or other manager being present. We evaluated the performance of the Committee as part of the The Board plans to continue to conduct evaluations annually. In Board performance evaluation process described above. order to obtain maximum value from the evaluations and to benefit from the varying skills and focuses of alternative facilitators, we may consider alternative facilitators, formats and approaches in 2 Procedure: What is our formal future years. This will ensure our evaluations remain appropriate procedure for developing policy on for the requirements of the Chairman and Board. executive remuneration? 7 Re-election: How do we ensure planned Our Remuneration Committee, which comprises solely independent Non-Executive Directors, operates under clear terms and progressive refreshing of the Board? of reference and is responsible for developing policy on executive Following a rigorous selection process and recommendation remuneration and overseeing our overall remuneration policy. Full by the Nominations Committee, Directors are appointed by the details of our procedure for developing remuneration policy and Board. They must, however, submit themselves for election by its links to strategy and risk management are given in our shareholders at the AGM following their appointment. Thereafter Remuneration Report on pages 55 to 70. our Articles of Association require all Directors to stand for re-election at least every three years. In addition, we have a policy Our Chairman, Mr I J G Napier, will, at our AGM in 2010, have that any Non-Executive Director, including our Chairman, having served for nine years concurrently with two Executive Directors. been in post for nine years or more, or who is non-independent To ensure we continue to comply with best practice, specifically for any reason, is subject to annual re-election. The performance that the independence of the Committee is maintained, he of each Director is considered as part of the Board evaluation, stepped down from the Remuneration Committee at its meeting before recommending such election or re-election. Following in September 2009. Mr Napier will only attend future meetings this evaluation the Board recommends that Dr K M Burnett, by invitation.

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INTERNAL CONTROL FRAMEWORK

MATTERS RESERVED FOR THE BOARD AND COMMITTEE TERMS OF REFERENCE

RISK CO-ORDINATION INTERNAL ORGANISATIONAL CORPORATE YEAR END DISCLOSURE COMMITTEE/RISK CONTROL GROUP FINANCE STRUCTURE DOCUMENTS CERTIFICATION COMMITTEE ASSESSMENT QUESTIONNAIRES SUMMARIES

GROUP COMPLIANCE

The Board recognises that we operate in an environment with C. Accountability and audit some unavoidable risks (see pages 16 and 17) and undertakes to 1 Financial reporting: How do we ensure these risks are properly understood and suitably managed, either directly or by exercising oversight of the internal control ensure we present a clear and balanced framework detailed below. The analysis of risk and oversight of assessment of the Company’s position? the resulting internal control measures taken to mitigate the effects of such risks are essential in enabling the Board to discharge its Our Board members recognise their responsibilities to ensure that responsibilities to safeguard shareholders’ investments, protect the statutory requirements to deliver balanced and understandable our assets and provide reliable financial information. However, assessments of the Company’s position are met. The Board is given the size and complexity of the Group such systems can satisfied that these responsibilities are met by using the financial provide only reasonable and not absolute assurance of meeting systems and applying the regulations described below, supported our internal control objectives as they manage rather than by our system of internal control. eliminate risk. They can, therefore, only provide reasonable and This was achieved by: not absolute assurance against material misstatement or loss. – using an appropriate system of accounting records, capable Control Environment of operating with reasonable accuracy and in compliance with The Board has established a robust control environment, the key local and international financial and legal reporting features of which are: requirements. The basis used to prepare our Group financial – the terms of reference of the Board, including the matters on statements is International Financial Reporting Standards which only the Board can decide, and each of the committees (IFRSs) as adopted by the European Union. Our parent it has established (see page 46); company financial statements and our Directors’ Remuneration Report are prepared in accordance with applicable law and – establishing an appropriate organisational structure with clear, United Kingdom Generally Accepted Accounting Standards; appropriate and documented delegation of authority from the Board to the Chief Executive’s Committee and executive – using IFRSs to ensure a true and fair view of the state of affairs management (see page 46); of the Group is given, including our profit or loss for the period; – maintaining our Corporate Documents which set out risk – deploying appropriate accounting policies within the framework management and behavioural standards for our operations of IFRSs and ensuring these are consistently applied; worldwide and provide a method for employees to raise – making judgements and preparing estimates that are matters of genuine concern (see page 46); reasonable and prudent; – The Risk Co-ordination Committee and Risk Assessment – operating within the guidelines of all the disclosure advice Summaries detailing the risk and risk mitigation identified provided by UK and international statute; by each area of the business (see page 46); – disclosing the business is a going concern; – Our year end certification processes (see page 46); – maintaining robust assurance processes and controls over our – Internal Control Questionnaires detailing the existing control financial reporting procedures, including Disclosure Committee processes within each area of the business (see page 46); and Board review; and – Group Finance who manage our financial reporting processes – extending these principles to half yearly reports and other (see page 47); reports in the public domain. – The Disclosure Committee who review all our major financial disclosures (see page 47); 2 Internal control: What does our – Group Compliance who monitor and review our internal Board do to maintain a sound system controls (see page 47); and of internal control? – Remuneration linked to long-term performance to discourage Overview excessive risk taking. Several ongoing activities, which satisfy the requirements of the Code, reassure our Board that a sound and robust system of internal control exists throughout our Group.

IMPERIAL TOBACCO GROUP PLC 2009 45 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

Terms of Reference Risk Co-ordination Committee and Risk The Board, which operates within clearly defined terms of reference, Assessment Summaries reserves certain matters for its own consideration and decision. It RISK CO-ORDINATION COMMITTEE has established appropriate committees which also operate within clearly defined terms of reference to oversee our control activities. These committees include an Audit Committee, Disclosure Committee and Risk Co-ordination Committee. Our Board and Committee processes, together with those embedded in the business, are fundamental to the effectiveness of our internal control measures and the delivery of the appropriate degree of control. Matthew Phillips Committee Chairman Organisational Structure The Board regularly reviews the Group’s organisational structure Members to seek to ensure that clearly defined lines of responsibility with appropriate delegation of authority and segregation of duties exist, Company Secretary Commercial Director, Sales with personnel of the necessary calibre in place to fulfil their roles. (Chairman) and Marketing Chief Operating Officer Finance Director, The aim of such delegated authority is that decisions, significant Cigar Business Unit Head of Group Compliance either because of their value or impact on other parts of the Head of Group Security and Head of Group Legal Group, are taken at an appropriate level as defined within the Risk Management Director of Accounting, Human Resources Director, Board’s terms of reference and our Corporate Documents. Forecasting & Tax Sales and Marketing Corporate Documents General Manager, Product Senior Commercial Legal Counsel Development and Purchasing Acts as Secretary to the Committee The Board has established a framework of policies and procedures with which employees are expected to comply. These cover key issues such as acceptable business practices, authorisation levels, Overview segregation of duties, ethical compliance matters and legislation, To supplement our existing risk management processes, the physical and data security as well as regulatory, governance and Group has established a Risk Co-ordination Committee (RCC). health, safety and environmental issues. The RCC assists the Chief Executive’s Committee and the Audit Our framework of control documents includes our Code of Committee in overseeing the management of material risk to the Conduct, policy documents and supporting guidance and Group. The RCC comprises senior managers representative of instruction. These documents, revised and updated during 2009, the Group’s functions. set out the corporate standards which we strive to achieve Responsibilities regardless of local regulations. The responsibilities of the RCC include: Following a review of our framework of control documents by – establishing a consistent methodology for identifying, assessing a cross-functional project team, a new corporate documents and ranking material risks; intranet site has been created in order to provide improved clarity on the purpose of this framework and how the various documents – the identification and assessment of existing measures in place are connected, maintained and used by the business. to manage and mitigate risks; and The next phase of this ongoing review project will be the roll-out –focusing and, where relevant, enhancing risk management and of enhanced guidance and training for our revised and updated mitigation activities, processes and procedures across the Group. control document framework. This will further support our How the Risk Co-ordination Committee Met its employees regarding the behaviour that is expected of them Responsibilities During the Year and particularly in respect of their business decisions. During the course of the year the RCC has developed a In order to further improve this framework so that it continues to comprehensive risk register to identify, assess and monitor the provide the appropriate control guidance for the enlarged Group, key risks we face and how they are mitigated and managed. our Group Code of Conduct is being reviewed. It is planned that This top down approach is supported by a bottom up approach the revised Code of Conduct will be rolled-out in 2010, with requiring individual markets, factories, regions and functions appropriate support and training. It is also anticipated that across the Group to produce annual risk assessment summaries the Code of Conduct will be made available on our corporate which are compared to the Group risk register. These ongoing website www.imperial-tobacco.com. risk assessment summaries identify major areas of business risk, There are well defined procedures for appraisal, approval, including specific local risks and how they are mitigated and control and review of capital and strategic expenditure managed by controls embedded in business processes. including acquisitions. Year End Certification The Board regularly reviews the Group’s Treasury, Tax and Our year end certification process requires each of our business Occupational, Health, Safety and Environmental policies. The entities to confirm compliance with our policies, fraud prevention Group’s Treasury function operates within a well defined policy processes and that risk mitigation controls have operated and framework designed to manage the Group’s financing and effectively throughout the year. All our senior managers are liquidity arrangements and to manage its exposure to, among also required to certify that there have been no related party other treasury risks, interest rate and foreign exchange risks. transactions within their areas of control. Our public interest disclosure (whistleblowing) policy encourages Internal Control Questionnaires employees to raise concerns about something seriously wrong Each of our business entities is required to maintain a suite or dangerous on a confidential basis, such that proportionate and of internal control questionnaires (ICQs) based on templates independent investigation of such matters can be undertaken. produced by Group Compliance. Management of each business entity is required to complete the templates detailing the internal control processes in operation within that entity. These ICQs are then reviewed by Group Compliance to ensure appropriate controls are in place and have operated effectively.

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ASSURANCE PROCESS FOR FINANCIAL REPORTING

VERIFICATION REVIEW EVALUATION DISCLOSURE

Significant verification Disclosure Committee Report on evaluation CEO and FD EXTERNAL REPORTS work performed reviews Group to CEO, FD and evaluate material financial disclosures Audit Committee issues for disclosure

The suite of ICQs comprises the most significant business Responsibilities activities relevant to that entity (for example, the control of fixed The responsibilities of the Committee include: assets) and confirms that appropriate controls exist and the – ensuring appropriate procedures exist to confirm the accuracy, processes supporting the controls are subject to frequent checks completeness and timeliness of our public financial to ensure they are effectively implemented. disclosures; and These ICQs form the basis of periodic reviews by Group – assisting our Chief Executive and Finance Director (Senior Compliance who ensure the controls are operating in practice and Officers) in determining all major financial disclosures are provide the appropriate protection for the business. accurate, complete and contain all necessary disclosures and, Group Finance therefore, provide a fair and accurate view of our performance. Our Group Finance Department manages our financial reporting How the Disclosure Committee Met its Responsibilities processes to ensure the information which enables our Board to During the Year discharge its responsibilities, including the production of our Half The Disclosure Committee reviews all major financial disclosures. Year and Annual Accounts, is provided on a timely basis. It is During the year these included Trading Updates, Interim supported by a network of finance managers throughout the Management Statements, Half Year Report, Annual Report Group who have the responsibility and accountability to provide and Accounts and bond issue documentation. information in keeping with our policies, procedures and internal best practices as documented internally in our Finance Manual. To meet its responsibilities when reviewing these major financial disclosures the Committee members make enquiries into all Monitoring of our financial position is based on our strategic and aspects of our business which, together with their business operational plans (the Plan) which we use to identify specific knowledge, ensure disclosures are complete with no material targets and objectives. issues omitted. The Committee reports on its reviews to our Senior Officers and where appropriate our Audit Committee. Throughout the year we produce ‘latest estimates’ to predict the likely year end position. The latest estimates are compared with The terms of reference of the Disclosure Committee were the Plan and enable us to monitor and check our performance reviewed during the year to ensure that they continued to and, where appropriate, challenge sections of the business if be appropriate. actual or anticipated performance varies from the Plan. Group Compliance Our Group Compliance function monitors and measures the DISCLOSURE COMMITTEE mitigation of risks across the Group. During the course of each year it undertakes targeted scheduled and ad hoc reviews throughout our businesses. The reviews are based on our Internal Control Questionnaires. Each review results in a report to the management of the business entity identifying any potential control weaknesses which the business entity is responsible for Matthew Phillips remediating. The most significant potential weaknesses are also Committee Chairman elevated to the Chief Executive’s Committee to monitor the remediation proposed and undertaken by management of the Members business entity. At the year end Group Compliance also conducts a review of risk assessments submitted by all markets, factories, Company Secretary Director of Accounting, regions and functions across the Group and obtains certificates (Chairman) Forecasting & Tax of confirmation from local management teams that appropriate Head of Group Compliance Head of Corporate Communications internal controls and processes have been operating within their (Co-ordinator) Deputy Company Secretary Head of Group Legal Acts as Secretary to the Committee businesses throughout the year. To support the Audit Committee and the Board in assessing the Overview effectiveness of internal controls, Group Compliance formally The Disclosure Committee comprises senior management from reports to the Audit Committee on the outcome of its ongoing across our business and meets as required to consider our major activities, including its programme of compliance reviews and any, financial disclosures. more general, business reviews. This process ensures that the

IMPERIAL TOBACCO GROUP PLC 2009 47 DIRECTORS’ REPORT: GOVERNANCE Corporate Governance Report continued

Audit Committee remains satisfied that the Group’s exposure to to consider at each meeting. The Audit Committee met its major business risks is minimised and the levels of retained risk responsibilities by: are acceptable. Group Compliance has a programme of reviews – approving our accounting policies; covering all our business entities on an annual, three or five yearly cycle dependent on materiality and perceived risk. – monitoring and reviewing the integrity of our financial statements and any announcements or judgements they contain including The above processes, together with reports from Group our Half Year Report and Annual Report and Accounts and Compliance, enable the Board, either directly or through the recommending that these be approved by our Board; Audit Committee, to regularly review the effectiveness of the key procedures which have been established to provide – receiving reports from, and questioning, members of Group internal controls. Compliance, Group Finance and other functions. This provides the Committee with the information required to oversee our The Board confirms that an ongoing process for identifying, systems of internal control over financial reporting, overall evaluating and managing the Group’s significant risks operated internal control policies, corporate governance procedures, throughout the year and up to the date of the approval of this the system of risk management and to assess the review and Annual Report and Accounts in accordance with the requirements mitigation of associated risks; of the Code and Turnbull guidance. – reviewing the Auditors’ presentation of their proposed audit 3 Audit Committee and Auditors: How do plan, fee proposal, and confirmation of their independence. This, together with management’s assessment of the Auditors’ we formally apply financial reporting and effectiveness and independence, allows the Committee to internal control principles? establish the scope, effectiveness, independence and objectivity of our Auditors and recommend their re-appointment AUDIT COMMITTEE to the Board; – receiving and, after due consideration, approving Group Compliance’s proposed work plan and compliance programme. Reports from Group Compliance are then used to monitor the performance and effectiveness of controls operating throughout the business; Mark Williamson Chairman – ensuring communication of our public interest disclosure policy by receiving reports of its distribution through our non-financial Members reporting system; – consideration of management’s report that there were no Mr M D Williamson, CA (SA) Mr C F Knott, FCMA (Chairman) Ms S E Murray material related party matters; and Mr M H C Herlihy Mr M R Phillips – consideration of the accounting treatment relating to ongoing Dr P H Jungels (Company Secretary, acts as Secretary to the Committee) enquiries detailed on pages 43 and 44. Going Concern Overview In order to satisfy themselves that we have adequate resources The Audit Committee oversees our financial reporting and internal for the future, the Committee and subsequently the Board controls and provides a formal reporting link with our Auditors. reviewed the Group’s committed funding and liquidity positions Structure and its proven ability to generate cash from trading activities. The Audit Committee comprises five Independent Non-Executive Our performance, as described in this Report, our future plans Directors. In line with the Code and our Audit Committee’s terms and the risks we face, see pages 16 and 17, were also reviewed. of reference, available on our website www.imperial-tobacco.com, These reviews provided the Committee with the confidence to it is a requirement that at least one Committee member is a recommend to the Board that the Group and Company, have financial expert. Messrs M D Williamson and C F Knott are both adequate resources to meet their operational needs for the qualified accountants and, therefore, meet this requirement. foreseeable future. For this reason the Board continues to adopt The Finance Director, the Director of Accounting, Forecasting the going concern basis in preparing the financial statements. & Tax, the Head of Group Compliance, the Deputy Company Auditor Independence Policy Secretary and other financial managers are invited to attend each In order to ensure the independence and objectivity of meeting of the Committee. The Head of Group Compliance meets our Auditors we maintain and regularly review our Auditor formally with the Committee without any Executive Director or Independence Policy. This policy provides clear definitions of other manager being present at each Committee meeting. services that our Auditors can and cannot provide. Our Auditors To provide a direct line of communication between our Auditors may only provide non-audit services where those services do not and Non-Executive Directors, our Auditors attend each Committee conflict with their independence, for example tax compliance meeting and have the opportunity to meet Committee members work. It also establishes a formal authorisation process, including without any Executive Director or other manager present. the tendering for non-audit services expected to generate fees in excess of £100,000 and pre-approval by the Audit Committee for The performance of the Committee was evaluated as part of the allowable non-audit work that they may perform. Our policy also Board performance evaluation process. establishes guidelines for the recruitment of employees or former How the Audit Committee Met its Responsibilities During employees of our Auditors and for the recruitment of our the Year employees by the Auditors. During the year and up to the date of approval of this Annual To ensure compliance with this policy our Audit Committee carried Report and Accounts, our Audit Committee achieved its out two reviews during the year of the remuneration received by responsibilities by working with a structured agenda of matters our Auditors for audit services, audit-related services and non-audit focused to coincide with key events of our financial reporting work. These reviews ensure a balance of objectivity, value for cycle, together with standing items that the Committee is required money and compliance with this policy. The outcome of these

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reviews was not only that performance of the relevant non-audit representatives of investors when requested. Through an external work by our Auditors was the most cost-effective way of conducting consultancy we annually perform a perception study of institutional our business but also that no conflicts of interest existed between investors’ views of our business. such audit and non-audit work. The fees for such non-audit work within the financial year were principally related to tax 2 Constructive use of the AGM: advisory work. How does the Board effectively use the These reviews enabled the Audit Committee to confirm that AGM to engage with investors? we continue to receive an efficient, effective and independent auditservice. We took full advantage of the provisions of the Companies

Act 2006, allowing us to communicate with our shareholders electronically. As a result, the primary means of communication This policy is published on our website, with the majority of our shareholders, who have not requested www.imperial-tobacco.com paper copies of our documentation, is through our corporate website www.imperial-tobacco.com. To ensure our shareholders have time to consider our Annual Report and Accounts and Statement of Auditors’ Responsibilities Notice of the AGM and lodge their proxy votes they were mailed Our statutory Auditors, PricewaterhouseCoopers LLP, are more than 20 working days prior to the meeting. responsible for forming an independent opinion on the financial statements of the Group and on the financial statements of the We offer all our shareholders the choice of submitting proxy votes Company as presented by the Directors, on other elements either electronically or in paper format. We also offer them the of the Annual Report and Accounts as required by legislation ability to abstain. or regulation and for reporting their opinion to members (page 73). In addition, our AGM provides a valuable opportunity for shareholders to meet and question our Directors. At the AGM D. Relations with shareholders our Chairman and Chief Executive give presentations on our 1 Dialogue with institutional performance and current business activities. shareholders: How does our Board To ensure compliance with the Code, separate resolutions are ensure that a satisfactory dialogue proposed on each discrete subject and all resolutions are put to a poll. The number of proxy votes for, against and withheld for with shareholders takes place? each resolution are displayed at the meeting. The final results are Dialogue with our shareholders is given the highest priority. During published through a Regulatory Information Service and on our the year we appointed a Director of Investor Communications to website following the AGM. help further ensure the Group meets its commitment to keep At our 2009 AGM we received votes representing approximately shareholders fully informed. 74 per cent of our issued share capital (excluding shares held Communication with Shareholders in treasury). The primary means of communication with shareholders is via Full details of our AGM to be held on Tuesday 2 February 2010, the Annual Report and Accounts and Half Year Reports and our together with explanations of the resolutions to be proposed, corporate website. In addition, we provide Interim Management are contained in the Notice of Meeting available on our website Statements and Trading Updates. We have attended numerous www.imperial-tobacco.com and posted with this Report. conferences, where we presented various aspects of the business to shareholders and potential shareholders. In addition, our Executive Directors and investor relations team regularly meet with investors after results announcements, as part of conferences and on an ad hoc basis and provide a point of focus for investors who wish to raise queries or concerns.

PROACTIVELY ENGAGING SHAREHOLDERS

In July 2009 a number of key investors and analysts attended a three day visit to our Moroccan operations where they had the opportunity to meet members of the senior management and Board. Topics discussed included Group strategy, the USA cigarette business, the Africa & Middle East business and the Group’s manufacturing operations. All the presentations are available on the Group’s website.

Our Chairman met with a number of key shareholders during the year and our Senior Independent Non-Executive Director is also available to meet key investors. All Directors made themselves available to meet shareholders at our AGM after the formal business of the meeting. Together the Chairman, Chief Executive, Finance Director, Chief Operating Officer and Director of Investor Communications ensure the Board is fully briefed on shareholders’ views such that any issues or concerns are fully understood and considered by the Board. We regularly meet with shareholder representative bodies on significant issues of interest and meet with Corporate Governance

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DIRECTORS’ REPORT: GOVERNANCE Directors’ Report: Other Information

The Directors submit their report together with the audited Number Percentage consolidated financial statements of the Group and the accounts of ordinary of issued shares millions share capital of the Company for the year to 30 September 2009. Invesco Limited 61 6.03 Financial Results and Dividends Legal & General Investment We include a review of our operational and financial performance, Management Limited 50 4.94 current position and future developments in our Business Review on pages 6 to 32. Morgan Stanley Investment 42 4.17 Management Limited The profit attributable to equity holders of the Company for the Franklin Resources Inc 41 4.04 financial year was £663 million as shown in our consolidated income statement on page 74. Note 1 to the financial statements Barclays PLC 37 3.66 gives an analysis of revenue and profit from operations and We have not received notification that any other person holds net assets. three per cent or more of our shares. The Directors have declared dividends as follows: The share interests of the Directors, their families and any In £’s million 2009 2008 connected persons are shown on page 59. Other than Ordinary Shares disclosed on pages 50 to 51, there are no agreements between Interim paid, 21.0p per share the Company and its Directors or employees providing for (2008: 18.2p1) 213 161 compensation for loss of office or employment due to a takeover. Proposed final, 52.0p per share Information concerning employees and their remuneration is given in (2008: 42.2p) 527 427 note 4 to the accounts and in the Directors’ Remuneration Report. Total ordinary dividends, 73.0p Significant Agreements That Take Effect, Alter or 1 740 (2008: 63.1p ) 588 Terminate on Change of Control 1 The 2008 interim dividend has been adjusted to reflect the bonus element of the The following agreements, which are summarised below, are Rights Issue in June 2008. those which we consider to be significant to the Group as a whole The final dividend, if approved, will be paid on 19 February 2010 and which contain provisions giving the other party a specific right to our shareholders on the Register of Members at the close to terminate them if we are subject to a change of control following of business on 22 January 2010. The associated ex dividend a takeover bid. date will be 20 January 2010. We paid an interim dividend on Some companies within the Group entered into a credit facilities 19 August 2009 to shareholders on the register at the close agreement (the Agreement) on 18 July 2007 under which certain of business on 19 June 2009. banks and financial institutions (the Lenders) made available to Share Capital Imperial Tobacco Finance PLC and Imperial Tobacco Enterprise Details of our share capital are shown in note 20 to the financial Finance Limited committed and uncommitted credit facilities. The statements. All shares, excluding those held in Treasury, are freely Agreement provides that, unless the Lenders otherwise agree, if transferrable and rank pari passu for voting and dividend rights. any person or group of associated persons acquires the right to At our AGM on 3 February 2009 shareholder authority for the exercise more than 50 per cent of the votes at a general meeting buyback of up to 106,794,000 ordinary shares of 10 pence each of the Company, Imperial Tobacco Finance PLC and Imperial was obtained. We hold 51,481,000 of our ordinary shares, Tobacco Enterprise Finance Limited must repay each loan utilised representing 4.82 per cent of issued share capital with an by them under the Agreement and the total commitments under aggregate nominal value of £5,148,100. We have not cancelled the Agreement will be immediately cancelled. these shares but hold them in a treasury shares reserve within our Some companies within the Group entered into a letter of credit profit and loss account reserve and they represent a deduction facility agreement (the Letter of Credit) dated 12 December 2007 from equity shareholders’ funds. Treasury shares do not carry under which the Lenders made available to Imperial Tobacco any voting or dividend rights. Limited a Letter of Credit. The Letter of Credit provides that, At 6 November 2009 we had been notified of the following unless the Lenders agree, if any person or group of associated interests in three per cent or more in our shares. persons acquires the right to exercise more than 50 per cent of

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the votes at a general meeting of the Company, Imperial Tobacco No political donations were made by Imperial Tobacco Group Limited must repay the letter of credit utilised by it under the Letter to EU political parties, organisations or candidates (2008: Nil). of Credit and the total commitments under the Letter of Credit will Creditor Payment Policy be immediately cancelled. Our current policy concerning the payment of the majority of our Imperial Tobacco Finance PLC (the Issuer) has issued bonds trade creditors is to follow the CBI’s Prompt Payers Code (copies under the €10,000,000,000 Debt Issuance Programme (as noted are available from the CBI, Centre Point, 103 New Oxford Street, below). The Company acted as guarantor. The final terms of this London WC1A 1DU). For other suppliers, our policy is to: series of notes contain change of control provisions under which – agree the terms of payment with those suppliers when the holder of each note will, subject to any earlier exercise by agreeing the terms of each transaction; the Issuer of a tax call, have the option to require the Issuer to redeem or, at the Issuer’s option, purchase that note at its – ensure that those suppliers are made aware of the terms of nominal value if: (a) any person, persons acting in concert or on payment by inclusion of the relevant terms in contracts; and behalf of any such person(s) becomes interested in: (i) more than – pay in accordance with our contractual and other 50 per cent of the issued or allotted ordinary share capital of the legal obligations. Company; or (ii) such number of shares in the capital of the Company carrying more than 50 per cent of the voting rights This policy applies to all payments to creditors for revenue normally exercisable at a general meeting of the Company; and and capital supplies of goods and services without exception. (b) as a result of the change of control, there is either: (i) a reduction Wherever possible UK subsidiaries follow the same policy and to a non-investment grade rating or withdrawal of the investment international subsidiaries are encouraged to adopt similar policies grade rating of the notes which is not raised again; reinstated to by applying local best practices. or replaced by an investment grade rating during the change of To demonstrate our commitment to our creditor payment policy, control period specified in the final terms; or (ii) to the extent that during the year we have become an approved signatory of the the notes are not rated at the time of the change of control, the Prompt Payment Code sponsored by the UK Department for Issuer fails to obtain an investment grade credit rating of the Business Enterprise & Regulatory Reform. notes within the change of control period as a result of the The amount of trade creditors outstanding as at 30 September 2009 change of control. was equivalent to 44 days (2008: 46 days) of trade purchases. The bonds issued in such manner are as follows: Research and Development – 15 September 2008 £600,000,000 8.125 per cent guaranteed We recognise the importance of investing in research and notes due 2024; development, which brings innovative improvements to the Group, both in the products supplied to the consumer and in – 15 September 2008 €750,000,000 7.25 per cent guaranteed production and marketing techniques. notes due 2014; Auditors and Disclosure of Information to Auditors – 17 February 2009 £1,000,000,000 9 per cent guaranteed Each of the Directors in office at the date of approval of this notes due 2022; Annual Report and Accounts confirms that: – 17 February 2009 €1,500,000,000 8.375 per cent guaranteed – so far as they are aware, there is no relevant audit information notes due 2016; (that is information needed by the Company’s Auditors in – 24 June 2009 £500,000,000 7.75 per cent guaranteed notes connection with preparing their report) of which the Company’s due 2019; and Auditors are unaware; and – 24 June 2009 €1,250,000,000 5 per cent guaranteed notes – they have each taken all the steps that he/she ought to have due 2012. taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Charitable and Political Donations Company’s Auditors are aware of that information. We have continued to support the communities in which we operate by donating £3.3 million (2008: £3.0 million) to charitable A resolution to reappoint PricewaterhouseCoopers LLP as causes of which £1.9 million (2008: £0.2 million) was in respect Auditors to the Company will be proposed at the AGM. of the UK through the Charities Aid Foundation.

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DIRECTORS’ REPORT: GOVERNANCE Directors’ Report: Other Information continued

Disclosure and Transparency Rules them to ensure that the financial statements and the Directors’ The Directors confirm that to the best of their knowledge: Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of – the financial statements, prepared in accordance with the the IAS Regulation. They are also responsible for safeguarding applicable set of accounting standards, give a true and fair the assets of the Company and the Group and hence taking view of the assets, liabilities, financial position and profit or reasonable steps for the prevention and detection of fraud and loss of the Company and the undertakings included in the other irregularities. consolidation taken as a whole; and The Directors are responsible for the maintenance and integrity – the Business Review on pages 6 to 32 includes a fair review of the Company’s website. Legislation in the United Kingdom of the development and performance of the business and the governing the preparation and dissemination of financial position of the Company and the undertakings included in the statements may differ from legislation in other jurisdictions. consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Each of the Directors, whose names and functions are listed on pages 36 and 37 confirm that, to the best of their knowledge: Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report, – the Group financial statements, which have been prepared in the Directors’ Remuneration Report and the Group and the parent accordance with IFRSs as adopted by the EU, give a true and Company financial statements in accordance with applicable law fair view of the assets, liabilities, financial position and profit of and regulations. the group; and Company law requires the Directors to prepare financial – the Directors’ Report includes a fair review of the development statements for each financial year. Under that law the Directors and performance of the business and the position of the have elected to prepare the Group financial statements in Group, together with a description of the principal risks and accordance with International Financial Reporting Standards uncertainties that it faces. (IFRSs) as adopted by the European Union, and the parent Employees Company financial statements in accordance with United Our employees are key to our ongoing success. Our employment Kingdom Generally Accepted Accounting Practice (United policies aim to attract the very best people. By applying universally Kingdom Accounting Standards and Applicable Law). Under accepted standards for human rights we ensure they are treated company law the Directors must not approve the financial with fairness, dignity and respect. This is reinforced through statements unless they are satisfied that they give a true and fair offering equal opportunities and fair consideration to applications view of the state of affairs of the Group and the Company and of for employment, career development and promotion, without the profit or loss of the Group for that period. In preparing these having regard to an employee’s gender, race, religion, age or financial statements, the Directors are required to: disability. These policies also cover the continuation of employment – select suitable accounting policies and then apply and appropriate training for employees who become disabled them consistently; during their employment. – make judgements and accounting estimates that are To ensure employees can share in our success we offer reasonable and prudent; competitive pay and benefit packages linked, wherever possible, to performance. Employees are encouraged to build a stake in – state whether IFRSs as adopted by the European Union and the Company through ownership of shares, with a number of applicable UK Accounting Standards have been followed, employee share plans offered during the year. subject to any material departures disclosed and explained We encourage all areas of our business to keep employees in the Group and parent company financial statements informed of the financial and economic factors affecting our respectively; and performance. We brief employee representatives on pan-European – prepare the financial statements on going concern basis unless issues through a European Employee Forum and the Altadis it is inappropriate to presume that the Company will continue European Works Council. in business. Pension Fund The Directors are responsible for keeping adequate accounting Our main pension fund, the Imperial Tobacco Pension Fund, is records that are sufficient to show and explain the Company’s not controlled by the Board but by a trustee company, the board transactions and disclose with reasonable accuracy at any time of which consists of five directors nominated by the Company; the financial position of the Company and the Group and enable one director chosen by employees and two by current and

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deferred pensioners. This trustee company looks after the May 2002. A Board Committee established in 2003 remains assets of the pension fund, which are held separately from those in place to monitor the progress of the investigations and the of the Group and are managed by independent fund managers. Group’s responses on behalf of the Board. The pension fund assets can only be used in accordance with In the course of 2005, parts of the investigations into certain of the fund’s rules and for no other purpose. Further details are the individuals were terminated on terms agreed by the individuals contained in our Remuneration Report on pages 55 and 70. with the authorities and settlement was made of any duty payable Business Review as a result of certain of the activities being investigated at no cost A review of the Group’s activities and future developments is to the Imperial Tobacco Group. In 2006 and 2007, investigations included in the Business Review section on pages 6 to 32. This against some of the other individuals were terminated for lack review fulfils the requirements of the Business Review contained of evidence. in section 417 of the Companies Act 2006, including the financial In September 2006, charges relating to smuggling were brought performance during the year on pages 8 to 11, key performance in connection with one of the investigations against 18 individuals, indicators on pages 14 and 15 and a description of the principal one of whom is a former Reemtsma employee. In October 2008, risks and uncertainties facing the Group on pages 16 and 17. the German court agreed to open trial in relation to these charges, The purpose of the Annual Report and Accounts is to provide but no hearing date has been set. information to the shareholders of Imperial Tobacco Group PLC. The Company, its Directors, employees, agents and advisers do In November 2006, in connection with a separate investigation, not accept or assume responsibility to any other person to whom charges relating to violations of the German foreign trade act this document is shown or into whose hands it may come and were brought against four other former Reemtsma employees. any such responsibility or liability is expressly disclaimed. The The German court has not yet made a decision as to whether to Annual Report and Accounts contain certain forward-looking open trial in relation to these charges. The authorities have applied statements with respect to the operations, performance and for financial penalties to be imposed on Reemtsma in relation to Financial condition of the Company and the Imperial Tobacco these latter charges. Such penalties could be imposed if the Group as a whole. By their nature, these statements involve former employees who have been charged are ultimately found uncertainties since future events and circumstances can cause to have committed offences. In those circumstances, the Imperial actual results to differ materially from those anticipated and Tobacco Group would seek recovery of any losses under no reliance should be placed on them. The forward-looking arrangements made on the acquisition of the business. statements reflect knowledge and information available at the Office of Fair Trading date of preparation of this Annual Report and Accounts and As previously reported, in October 2003 the UK Office of Fair the Company undertakes no obligation to update these forward- Trading (OFT) commenced an investigation under the Competition looking statements. Nothing in this Annual Report and Accounts Act 1998 into the operation of the UK tobacco supply chain. should be construed as a profit forecast. On 24 April 2008, the OFT issued a Statement of Objections The principal operating subsidiaries within the Group are shown (SO) which set out the OFT’s allegations against tobacco on pages 131 and 132. manufacturers, Imperial Tobacco Group and Gallaher, and 11 Insurance retailers. The OFT alleges that these tobacco manufacturers and We have purchased and, throughout the year, maintained retailers variously engaged in one or more unlawful practices in appropriate insurance cover in respect of Directors’ and Officers’ relation to retail prices for some or all of a number of tobacco liabilities. The Company has also entered into qualifying third products in breach of Chapter I of the Competition Act 1998. party indemnity arrangements for the benefit of all its Directors, Following the issue of the SO, the OFT invited recipients of the in a form and scope which comply with the requirements of the SO to enter into settlement discussions on a ‘without prejudice’ Companies Act 2006 and the transitional arrangements in respect basis to reach ‘early resolution agreements’ with the OFT. of the Companies Act 1985. These indemnities were in force On 11 July 2008, the OFT announced that six of the parties throughout the year and up to the date of this Report. subject to the SO had reached early resolution agreements with Update on Ongoing Enquiries the OFT, agreeing to pay a combined figure of some £132.3 German Investigations million if all leniency and early resolution discounts are taken into Certain investigations were initiated by German authorities in account. Other than Imperial Tobacco Group, the parties which January 2003 into alleged foreign trading and related violations have also not settled with the OFT and are therefore contesting by a number of people, including Reemtsma employees, during the OFT’s allegations, are the Co-operative Group, Morrisons a period prior to its acquisition by Imperial Tobacco Group in (including Safeway), Shell and Tesco.

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DIRECTORS’ REPORT: GOVERNANCE Directors’ Report: Other Information continued

Imperial Tobacco Group’s detailed written response to the SO was We understand that a claim was filed against us (and other submitted to the OFT on 15 August 2008 and Imperial Tobacco’s tobacco companies) in Bulgaria in March 2008 but we have not representatives made submissions to the OFT in defence of the yet been formally served with any court documents. We further allegations at an oral hearing on 3 December 2008. understand that in December 2008, the Sofia City Court partially rejected the claim and the claimant has appealed this decision The OFT indicated in a letter dated 12 October 2009, that it to the Supreme Court of Cassation. currently intends to notify the parties of its ‘final’ decision in the investigation in the first quarter of 2010. We have no indication In September 2009 an individual claim was brought against us of whether that will be an infringement decision, a file closure (and others) in Turkey. We filed a statement of defence at a decision or some other form of decision. preliminary hearing on 3 November 2009. If the OFT proceeds to an infringement decision, it may impose a Following our acquisition of Commonwealth Brands in April 2007, fine. The maximum amount of any fine, under the statutory regime we are currently facing one claim brought by an individual in the we believe that the OFT will apply, is 10 per cent of a company’s United States. A motion for summary judgment was filed by UK turnover for up to three years (although the actual amount may Commonwealth Brands in October 2005 and remains pending. be less). By way of example, in the three years to 30 September In Australia, a claim was filed in January 2009 against Imperial 2003, Imperial Tobacco Group’s aggregate net UK turnover was Tobacco Australia Limited and other tobacco companies. The £2,215 million. The applicable turnover on which the amount of claim was discontinued in October 2009. a fine is based expressly excludes VAT and other taxes directly related to turnover, which Imperial Tobacco Group has been We understand that the Saudi Ministry of Health has issued advised would also exclude duty. In addition, if the OFT were to legal proceedings against distributors for international tobacco make an infringement finding, it could issue orders prohibiting that companies to recover the alleged costs of providing medical care activity in the future, whilst the infringing company might face the to individuals. No Imperial Tobacco Group company has been prospect of damages actions from third parties. If the OFT were served with any court documents in relation to this claim. to make an infringement decision, Imperial Tobacco Group would To date, no action has been successful or settled in favour of any be able to appeal the OFT’s decision to the Competition Appeal claimant in any tobacco-related litigation against Imperial Tobacco Tribunal, and ultimately, on a point of law to the Court of Appeal. or any of its subsidiaries. Imperial Tobacco has been advised by Update on Tobacco-Related Litigation its lawyers that it has meritorious defences to the legal proceedings We are not facing any tobacco-related litigation in the UK. In the in which damages are sought for alleged tobacco-related health Republic of Ireland, the number of tobacco-related claims has effects. We will continue to vigorously contest all such litigation fallen from 307 in 1997, to 11. Ten of these claims are subject against us. to dismissal motions. The other claim is inactive. The dismissal By order of the Board motion in respect of one claimant was heard by the Dublin High Court in 2006. In April 2007, the court ruled that this claim should be dismissed. This decision has been appealed and the dismissal motions in respect of the nine other active claims have been stayed pending the appeal. No date has been set for the appeal hearing. Following our acquisition of Altadis in January 2008, we are currently facing two claims in Spain brought on behalf of the Matthew R Phillips Regional Government of Andalucia each arising out of the same 10 November 2009 allegations. The first claim has been dismissed and an appeal has Imperial Tobacco Group PLC been rejected by the Spanish Supreme Court. The Regional Registered in England and Wales No: 3236483 Government could, theoretically, make a further appeal to the Supreme Court. The second claim was filed in May 2009 and preliminary objections were filed by Altadis and the other tobacco company defendants in September 2009. We are not facing any claims in France. Following our acquisition of Logista in May 2008, we are currently facing two claims in Italy. One is at an initial stage and the other has been dismissed but appealed.

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DIRECTORS’ REPORT: BUSINESS REVIEW: GOVERNANCE Directors’ Remuneration Report

We entered the 2009 reward review conscious of the economic background and widespread comment on executive remuneration. The Remuneration Committee believes our remuneration practices link closely with our strategy, sustained performance and risk management.

REMUNERATION COMMITTEE

Pierre Jungels Chairman

Members

Dr P H Jungels Mr I J G Napier (Chairman) (until 7 September 2009) Mr M H C Herlihy Mr M D Williamson Mr C F Knott Mr M R Phillips, Ms S E Murray (Company Secretary, acts as Secretary to the Committee)

Introduction Responsibilities We have prepared this Report in accordance with the Companies The responsibilities of the Committee include: Act 2006, Statutory Instrument 2008/410 The Large and – determination of the Remuneration Policy for Executive Medium-sized Companies and Groups (Accounts and Reports) Directors and members of the Chief Executive’s Committee; Regulations 2008 (the Regulations) and to meet the requirements of the Listing Rules of the UK Listing Authority. We describe – recommendations to the Board in respect of the how the principles of good governance relating to directors’ Chairman’s remuneration; remuneration set out in the Combined Code on Corporate – determination of targets for performance related pay elements; Governance (the Code) are applied in practice. – policy for Directors’ pensions and contracts; The Regulations require our Auditors to report to shareholders on the audited information within this Report and to state whether, – oversight of the overall policy for senior in their opinion, those parts of the Report have been prepared in management remuneration; accordance with the Companies Act 2006. The Auditors’ opinion – oversight of disclosures in the Remuneration Report; and is set out on page 73 and we have clearly marked the audited sections of the Report. – oversight of the Group’s employee share plans. This Report covers the following: Overview The Group’s remuneration policy is intended to attract and 1 the Committee’s objectives, membership and main activities retain high quality employees throughout the organisation, in 2009; encourage loyalty and motivate them to achieve a high level of corporate performance in an increasingly competitive and 2 Directors’ emoluments and share interests; international environment. Performance related rewards reflect the business performance 3 a review of Imperial Tobacco Group’s remuneration policy delivered by the Board and senior management in a year of and practice; significant achievement that included the integration of our Altadis acquisition and growth in mature and emerging markets. 4 service agreements; For the financial year ending 30 September 2010 the overall 5 remuneration practices; structure of the Group’s remuneration policy will remain unchanged. However, to further motivate the achievement 6 Executive Directors’ pensions; and of strategic objectives the potential maximum bonus has been increased subject to the achievement of stretching, measurable 7 other information. strategic objectives as discussed below.

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DIRECTORS’ REPORT: BUSINESS REVIEW: GOVERNANCE Directors’ Remuneration Report continued

1 The Committee’s Objectives, Hewitt New Bridge Street also reviews the Group’s remuneration Membership and Main Activities principles and practices against corporate governance best practice and helps ensure adherence to the Group’s Executive The Remuneration Committee operates under clear written Directors’ Remuneration Policy. terms of reference, which can be found on our website Executive remuneration data provided by Towers Perrin and www.imperial-tobacco.com. The Remuneration Committee Boardex was also used to assist in benchmarking to ensure the formally confirms that throughout the year it has complied with consistent application of our executive Remuneration Policy. the governance rules and best practice provisions relating to remuneration as set out in section 1 of the Code. To ensure Committee members are fully aware of new developments and evolving remuneration best practice, The Committee’s key objectives are to: Hewitt New Bridge Street presented a review of developments – ensure the Group’s remuneration arrangements align with in UK corporate governance, focusing primarily on executive our values, support our corporate strategy and enhance pay governance. performance as measured by our key performance indicators Solicitors Allen & Overy LLP are retained by the Company and (KPIs), see pages 14 and 15; provide legal advice on our employee share plans. Allen & Overy – maintain a competitive remuneration package appropriate to LLP and Ashurst LLP also provide services to the Committee as the business environment in the countries in which we operate and when required. Both Allen & Overy LLP and Ashurst LLP so we can attract, develop, retain and motivate a high quality provide other legal services to the Group. pool of talented employees at all levels, whilst ensuring a clear The Company has appointed Alithos Limited to undertake total link between reward and performance; shareholder return (TSR) calculations and provide advice on all – ensure that the remuneration policy motivates employees at all TSR related matters, including advice in respect of the bespoke levels to enhance our performance without encouraging them comparator group. Alithos Limited provides no other services for to take undue risks; and the Group. – align senior executives’ remuneration with the interests of PricewaterhouseCoopers LLP, our Auditors, perform agreed upon shareholders and other stakeholders, including customers procedures on earnings per share (EPS) calculations used in our and employees. employee share plans to assist the Committee in determining the level of awards vesting. Membership The Remuneration Committee, which met four times during Main Activities – How the Committee met its Objectives the year, comprises five independent Non-Executive Directors The Board is ultimately accountable for executive remuneration together with the Company Chairman, Mr I J G Napier. Mr Napier but delegates responsibility to the Remuneration Committee. is specifically excluded from any matter concerning the details Our Remuneration Committee addressed the following main of his own remuneration or conditions of service. The Committee issues during the year: members have no personal financial interest in the matters – recommending that our Remuneration Policy for Directors discussed other than as shareholders. remains unchanged; To reinforce the independence of the Committee, a standing item – the annual review of the Chairman’s, Executive Directors’ and at each meeting allows the members of the Committee to meet Chief Executive’s Committee (CEC) members’ remuneration; without the Company Chairman, any Executive Director or other manager being present. As Mr Napier is approaching the ninth – reviewing the executive bonus arrangements and targets; anniversary of his election to the Board, in line with corporate – reviewing CEC members’ contracts; governance best practice, he stepped down from the Committee on 7 September 2009. – overseeing Remuneration Policy for senior management and employees and our employee share plans; Advice and Support The Committee is provided with the following internal and external – undertaking the annual review of the Committee Terms advice and support: of Reference; and Internal – the disclosures in this Report. During the year Mr G Davis (Chief Executive) and Mr R Dyrbus (Finance Director) were invited to attend Remuneration Committee HOW THE COMMITTEE SPENT ITS TIME meetings to answer questions. Mr M R Phillips (Company Secretary) Executive Remuneration also attended meetings as secretary to the Committee. They were Performance metrics all specifically excluded from any matter concerning the details including Bonus of their own remuneration or conditions of service. Review of PDMR Contracts Oversight of share Mrs K A Turner (Group Human Resources Director), the Group based incentives Compensation and Benefits Manager and the Deputy Company Other including best Secretary also provided internal support and advice on market practice updates and regulatory developments in remuneration practice and our employee share plans. External To assist the Remuneration Committee in setting the remuneration package for each Executive Director and member of the Chief Executive’s Committee advice is provided by remuneration consultants Hewitt New Bridge Street and Towers Perrin, both of whom are engaged by the Committee as required. Both are signatories to the draft Code of Conduct for Remuneration Advisers. Neither provides any services to the Group other than those explained below.

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2 DIRECTORS’ EMOLUMENTS FOR THE YEAR ENDED 30 SEPTEMBER 2009 (AUDITED)

2009 2008 £’000 £’000 Executive Directors Base salary 2,612 2,460 Benefits 84 85 Pension salary supplement 256 230 Bonus 2,573 2,560 LTIP annual vesting1 2,248 2,576 SMS annual vesting2 1,453 1,877 9,226 9,788 Non-Executive Directors Fees 1,101 846 Benefits 115 1 Subsidiary Board fees 5 32 Consultancy fees 702 119 1,923 998 Former Executive Directors Salary of former Executive Director – 283 Pension salary supplement of former Executive Director – 16 Consultancy fees to former Executive Director 112 100 Subsidiary Board fees 81 58 LTIP vesting1 – 893 SMS vesting2 – 676 Benefits – 11 193 2,037 Fees of former Non-Executive Directors Subsidiary Board fees 28 66 28 66 Total remuneration 11,370 12,889

Chief Executive’s Committee Base salary 1,342 906 Benefits 74 29 Pension salary supplement 99 43 Bonus 819 572 LTIP annual vesting1 285 282 SMS annual vesting2 369 215 2,988 2,047

1 Value of LTIP shares vesting in the year based on the prevailing closing share price on the day of exercise. 2 Value of SMS shares vesting on maturity based on the prevailing closing share price on the day of vesting.

KEY MANAGEMENT COMPENSATION FOR THE YEAR ENDED 30 SEPTEMBER 2009 (AUDITED)

2009 2008 £’000 £’000 Short term employee benefits 9,427 7,609 Post-employment benefits 378 364 Other long-term benefits – – Termination benefits – – Share-based payment 3,688 3,265 13,493 11,238

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DIRECTORS’ REPORT: BUSINESS REVIEW: GOVERNANCE Directors’ Remuneration Report continued

EMOLUMENTS BY INDIVIDUAL DIRECTOR (AUDITED)

Base Pension Benefits Sub Sub salary/ Base Subsidiary Consultancy salary in total total Total Total fees from salary Fees board fees fees Bonus supplement1 kind2 2009 2008 LTIP3 SMS3 2009 2008 1/10/2009 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Executive Directors Mr G Davis, Chief Executive 1,033 –– –1,100 – 26 2,159 2,023 1,223 635 4,017 3,899 1,064 Mr R Dyrbus, Finance Director 623 –– –663 218 26 1,530 1,450 582 403 2,515 2,642 642 Mr G L Blashill, Group Sales and Marketing Director 455 –– –385 – 16 856 814 278 215 1,349 1,239 469 Mrs A J Cooper, Chief Operating Officer 501 –– –425 38 16 980 852 165 200 1,345 1,347 546 Mr D Cresswell4, Manufacturing Director –– – –– – – – 196 –– – 661 – 2,612 –– –2,573 256 84 5,525 5,335 2,248 1,453 9,226 9,788 2,721 Non-Executive Directors Mr I J G Napier, Chairman – 420 –––––420 360 ––420 360 433 Mr J-D Comolli5, Deputy Chairman – 106 – 702 ––115 923 140 ––923 140 118 Mr A G L Alexander6, Vice Chairman –– – –– – – – 29 –– – 29 – Mr B F Bich7 – 65 –––––65 45 ––65 45 – Dr K M Burnett – 65 –––––65 60 ––65 60 65 Mr M H C Herlihy – 65 –––––65 60 ––65 60 65 Dr P H Jungels8 – 100 –––––100 85 ––100 85 105 Mr C F Knott – 65 –––––65 60 ––65 60 65 Ms S E Murray – 65 –––––65 60 ––65 60 65 Mr B Setrakian9 – 65 59 –– – – 70 29 ––70 29 65 Mr M D Williamson8 – 85 –––––85 70 ––85 70 85 – 1,101 5 702 ––115 1,923 998 ––1,923 998 1,066 Former Directors Mr D Cresswell4 –– 28 12 –––40 –––40 –– Mr S Huismans10 –– 28 –– – – 28 66 ––28 66 – Mr S T Painter11 –– 53 100 –––153 158 ––153 158 – Dr F A Rogerson12 –– – –– – – – 310 –– – 1,879 – ––109 112 –––221 534 ––221 2,103 –

1 Further details are contained in the Executive Directors’ pension section on pages 68 and 69. 2 Benefits in kind principally include the provision of a company car, health insurance and, in the case of Mr J-D Comolli, life insurance. 3 LTIP and SMS represent the value of awards vesting and LTIP options exercised in the year. 4 Mr D Cresswell retired from the Board on 31 December 2007. However, Mr Cresswell received fees in connection with his Non-Executive Director appointments to Supervisory Boards within the Reemtsma Group and Subsidiary Boards within the Altadis Group. 5 Mr J-D Comolli was appointed on 15 July 2008 and in addition to his Director’s fees receives consultancy fees for services provided to the Group which will cease on 30 September 2010. 6 Mr A G L Alexander retired from the Board on 29 January 2008. 7 Mr B F Bich was appointed on 25 April 2008 and resigned on 16 September 2009. 8 Includes payment in respect of chairmanship of Board Committees at an annual rate of £15,000 in respect of the Remuneration Committee and £20,000 in respect of the Audit Committee. 9 Mr B Setrakian was appointed on 25 June 2008. Until December 2008 he received remuneration in respect of Non-Executive appointments within Altadis’ USA business. 10 Mr S Huismans retired from the Board on 31 January 2006. However, Mr Huismans received fees in connection with his Non-Executive Director appointments to Supervisory Boards within the Reemtsma Group and Subsidiary Boards within the Altadis Group. 11 Mr S T Painter retired from the Board on 31 May 2000 but received fees on a consultancy basis and in connection with his Non-Executive Director appointments to Supervisory Boards within the Reemtsma Group and Subsidiary Boards within the Altadis Group. 12 Dr F A Rogerson resigned from the Board on 27 June 2007. Dr Rogerson completed a handover period and his employment terminated on 27 June 2008. No sums were paid to any Director by way of taxable expenses allowances and no Directors waived their fees.

58 IMPERIAL TOBACCO GROUP PLC 2009 DIRECTORS’ INTERESTS IN ORDINARY SHARES (BENEFICIAL, FAMILY AND ANY CONNECTED PERSONS INTERESTS) (AUDITED)

Contingent Rights to Ordinary Shares Ordinary Shares Sharesave Options (LTIP and SMS Shares) Total Interests 1/10/08 30/9/09 1 6/11/09 1/10/08 30/9/09 1/10/08 30/9/09 1/10/08 30/9/09 1 6/11/09 Executive Directors Mr G Davis 610,300 614,540 614,540 870 947 400,044 446,274 1,011,214 1,061,761 1,061,761 Mr R Dyrbus 393,807 396,866 396,866 714 689 204,345 224,539 598,866 622,094 622,094 Mr G L Blashill 149,854 153,139 153,139 1,465 729 105,192 116,417 256,511 270,285 270,285 Mrs A J Cooper 104,628 107,664 107,664 771 729 82,234 105,828 187,633 214,221 214,221 Non-Executive Directors Mr I J G Napier 10,281 12,538 12,538 –– – –10,281 12,538 12,538 Mr J-D Comolli – 684 684 –– – – –684 684 Mr B F Bich 2 377 2,773 3 2,773 3 –– – –377 2,773 3 2,773 3 Dr K M Burnett 920 1,262 1,262 –– – –920 1,262 1,262 Mr M H C Herlihy 2,173 2,589 2,589 –– – –2,173 2,589 2,589 Dr P H Jungels 4,866 5,276 5,276 –– – –4,866 5,276 5,276 Mr C F Knott 920 1,262 1,262 –– – –920 1,262 1,262 Ms S E Murray 1,802 2,144 2,144 –– – –1,802 2,144 2,144 Mr B Setrakian 62 404 404 –– – – 62 404 404 Mr M D Williamson 1,934 2,276 2,276 –– – –1,934 2,276 2,276

1 Or date of resignation if earlier. 2 Mr B F Bich resigned on 16 September 2009. 3 Includes 377 ordinary shares and 1,198 American Depositary Shares (ADSs), each ADS representing two ordinary shares.

There have been no changes in these holdings since 30 September 2009. 3 A Review of Imperial Tobacco Group’s Remuneration Policy and Practice Remuneration Strategy We operate in a highly competitive, international environment. Our remuneration strategy is to ensure that the level of remuneration and benefits offered attracts, develops, retains and motivates our talented employees at all levels across the Group, while ensuring a clear link between reward and performance. We set out to provide competitive remuneration to all employees, appropriate to the business environment in the countries in which we operate. Our remuneration arrangements align with and support our corporate strategy. We continue to assign employees internationally to achieve the optimum balance of experience within the Group and facilitate employee development. We have a cohesive reward structure in place to ensure all our employees engage with our strategic goals and strive to achieve them. We align the interests of shareholders and employees at all levels by giving our employees the opportunity to build a shareholding in Imperial Tobacco Group through a number of employee share plans. This alignment is reinforced further through the Group’s executive share retention policy discussed on page 67. Where possible our employees were offered participation in one or more employee share plans during the year, with in excess of 31 per cent of eligible employees participating in one or more of those plans. Executive Remuneration Policy We consider it critical to align the remuneration package for Executive Directors and members of the Chief Executive’s Committee with the Group’s strategy and risk. In designing and reviewing the executive remuneration policy we aim to attract and retain high quality executives, and induce loyalty and motivate executives to achieve a high level of corporate performance in line with the best interests of shareholders. We also recognise the need for the overall remuneration package not to be excessive, particularly given the current economic climate. Our executive remuneration policy combines short-term and long-term rewards focusing on, and significantly weighted towards, performance related pay elements that take into account individual, functional and corporate performance. This focus ensures executive remuneration supports our strategy by linking the major elements of remuneration to performance criteria linked to our KPIs. The main components are base salary, annual bonus, share matching scheme (SMS), long term incentive plan (LTIP) and pension benefits. We continue to set base salary at around the median level of the comparator group of companies, whilst providing the Executive Directors and Chief Executive’s Committee members with the capacity to earn upper quartile total compensation on achievement of superior business performance. Our comparator group of companies remains the FTSE 50, excluding companies in the financial and pharmaceutical sectors, with reference to the FTSE 30, excluding companies in the financial and pharmaceutical sectors. To ensure our remuneration policy is firmly linked to our strategy and risk management, Executive Directors are required to build a significant stake in the Company through our share retention guidelines and the mandatory deferral of elements of annual bonus in the form of shares. This link is further supported through the setting of bonus and other targets that reflect key business imperatives, for example earnings per share and profit growth, total shareholder return, debt reduction and volume growth.

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DIRECTORS’ REPORT: BUSINESS REVIEW: GOVERNANCE Directors’ Remuneration Report continued

4 Service Agreements Executive Directors’ Service Agreements The service agreements for Mr G Davis and Mr R Dyrbus were entered into at the time of the demerger of the Company from the Hanson Group. The provisions dealing with compensation on termination following a change of control in their service agreements reflect that. The service agreements for the other Executive Directors reflect the Company’s established policy that Executive Directors have service agreements which are terminable on no more than one year’s notice and that there is no entitlement to the payment of a predetermined amount on termination of employment in any circumstances. There are no liquidated damages provisions for compensation on termination within Executive Directors’ service agreements, except for those set out in the table below. The Executive Directors’ service agreements do contain payment in lieu of notice provisions but these are at the Company’s sole discretion. We are unequivocally against rewards for failure. Apart from the limited respects referred to above, the circumstances of the termination and an individual’s duty and opportunity to mitigate loss are taken into account in every case. Our policy is to stop or reduce compensatory payments to former Directors to the extent that they receive remuneration from other employment during the compensation period and that any such payments would be paid monthly in arrears. Under the Rules of the LTIP and SMS outstanding awards vest on termination for certain reasons, including death, retirement, redundancy, the business or company in which the participant is employed ceasing to be part of the Group or on a change of control. Awards vest on a time-related pro rata basis and are subject to satisfaction of relevant performance criteria. If, however, the termination of employment is for a reason other than one of those specified in the relevant rules, an individual’s full awards lapse.

EXECUTIVE DIRECTORS’ SERVICE AGREEMENTS

Executive Directors Date of contract Expiry date Compensation on termination following a change of control Mr G Davis 21 August 1996 Terminable on 52 weeks’ notice Payment of a liquidated sum calculated by reference to benefits receivable during the notice period Mr R Dyrbus 21 August 1996 Terminable on 52 weeks’ notice Payment of a liquidated sum calculated by reference to benefits receivable during the notice period Mr G L Blashill 28 October 2005 Terminable on 52 weeks’ notice No provisions Mrs A J Cooper 1 July 2007 Terminable on 52 weeks’ notice No provisions

Policy in Respect of Remuneration from External Board Appointments We recognise that external non-executive directorships are beneficial for both the Executive Director concerned and the Company. At the discretion of the Board, Executive Directors are permitted to retain fees received in respect of any such non-executive directorship. Each serving Executive Director is restricted to one external non-executive directorship and may not serve as the chairman of a FTSE 100 company. The Executive Directors who held such appointments during the financial year were Mr G Davis, who serves on the Board of Wolseley plc and received fees of £71,800, and Mrs A J Cooper, who serves on the Board of Inchcape PLC and received fees of £10,000. Remuneration Policy for Non-Executive Directors During the year, fees for Non-Executive Directors, and chairmanship fees in respect of the Remuneration and Audit Committees, were reviewed by the Board as a whole. The review took into account market practice with reference to the comparator group on page 59. The Chairman’s remuneration was determined by the Board following recommendation from the Remuneration Committee. The Chairman and Non-Executive Directors were not permitted to take part in discussions relating to their own remuneration. With the exception of reimbursement of expenses incurred in connection with their directorship of the Company, Non-Executive Directors receive no other material pay or benefits. They are not eligible to participate in the Group’s employee share plans, annual bonus schemes and are not eligible for pension scheme membership. During the year Mr Comolli, however, received pension payments relating to his former executive position within the Altadis Group. To align further the interests of the Chairman and Non-Executive Directors with those of shareholders, a proportion of their fees is applied to purchase shares in the Company. These shares are held by a nominee during the term of their directorship. Up to the date of his resignation Mr Bich elected to apply his entire Director’s fees, after statutory deductions, to the purchase of shares in the Company. The Company’s Articles of Association enable the Board to set the remuneration of Directors within the limits set by shareholders. The current aggregate limit is £2.0 million and the aggregate amount paid in the financial year was £1.1 million. Executive Directors are remunerated in respect of their executive appointments, under the terms of their service contacts, and receive no additional fees for serving as directors. Following his retirement from the Board in January 2006, Mr S Huismans remains a member of Supervisory Boards within the Reemtsma group. He was also appointed as a Non-Executive Director of Altadis, S.A. upon its acquisition by the Group until 5 November 2008. Mr S Huismans receives additional remuneration for fulfilling such non-executive roles. Non-Executive Directors’ Letters of Appointment The Chairman and Non-Executive Directors do not have service agreements with the Company but the terms of their appointment are recorded in letters of appointment which are available for viewing at our registered office during normal business hours and prior to and at the AGM. In line with our annual review policy the Chairman’s and Non-Executive Directors’ terms of appointment were reviewed and confirmed by the Board on 2 February 2009. Under the terms of our Articles of Association Non-Executive Directors stand for election at the first AGM following appointment and are subject to re-election by shareholders every three years. There are no provisions regarding notice periods in their letters of appointment which state that the Chairman and Non-Executive Director will only receive payment until the date their appointment ends and, therefore, no compensation is payable on termination. The letters of appointment detail the time commitment expected of each Non-Executive Director.

60 IMPERIAL TOBACCO GROUP PLC 2009 5 Remuneration Practices

PERCENTAGE OF TOTAL ACTUAL REMUNERATION: FOR THE FINANCIAL YEAR TO 30 SEPTEMBER 2009

Salary Mr G Davis Pension Salary Supplement Beneﬁts in kind Mr R Dyrbus Bonus SMS LTIP Mr G L Blashill

Mrs A J Cooper

0 10 20 30 40 50 60 70 80 90 100

EXECUTIVE DIRECTORS’ 2008/2009 REMUNERATION POLICY

Element Objective Award Level Performance Criteria Performance Period Base salary Attract and retain high Median of FTSE 50 N/A N/A performing individuals excluding companies in reflecting market value of the financial and role and executive’s skills pharmaceutical sectors and experience. with reference to the FTSE 30 excluding companies in the financial and pharmaceutical sectors.

Annual bonus Incentivise delivery of Maximum percentage Financial Targets (100% 1 year Group objectives and of base salary. base salary Chief Executive enhance performance, Cash element: and Finance Director, 75% including as measured by Chief Executive and other Executive Directors). our key performance Finance Director first Strategic Targets indicators discussed on 100%, other Executive (25% base salary for pages 14 and 15. Directors first 75%. all Executive Directors). Non-matchable deferred 3 year shares element: retention period up to an additional 25% of base salary.

Share matching Incentivise growth in Group May elect to invest some or Adjusted EPS growth. 3 years scheme EPS (adjusted for certain all of gross cash element of items) and align with the annual bonus in shares. interests of shareholders. These can be matched on a 1:1 basis.

Long term Incentivise long-term Percentage of base salary: 3 elements – 50% adjusted 3 years incentive plan delivery of EPS and TSR Chief Executive 200%, EPS growth, 25% TSR vs (adjusted for certain items) Finance Director 150%, FTSE 100, 25% TSR vs and align with interests other Executive comparator group. of shareholders. Directors 100%.

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Base Salary The Remuneration Committee reviews base salary annually following detailed consideration of a number of factors including individual responsibilities, performance, market value of the relevant executive and external market data. In line with our Remuneration Policy base salary is set within a range around the market median of the comparator group. Base salary is the only element of the package used to determine pensionable earnings. When setting base salary the Remuneration Committee is provided with external benchmarking data compiled by Towers Perrin. The Committee is also provided with data in respect of the executive’s overall package so it can be benchmarked against the comparator group. This data also enables the Committee to review the effect of any change in base pay on the executive’s overall package. Annual base salary increases for Executive Directors, effective 1 October 2009, were three per cent. In reviewing base salaries, the Committee considered the current economic environment, salary data in respect of the FTSE comparator group, the levels of 2009 base salary inflation for executives within the tobacco and consumer goods sectors and the levels of base salary increase for our other employees. Annual Bonus For the financial year ended 30 September 2009 the potential maximum bonus was 125 per cent of base salary for the Chief Executive and Finance Director and 100 per cent for other Executive Directors. The performance targets for the year were based on a matrix comprising adjusted earnings per share (EPS) and debt, together with stringent, quantifiable strategic objectives including volume growth and criteria related to delivery of synergies from the Altadis integration. They are not disclosed as they are considered to be commercially confidential. During the year we delivered adjusted EPS of 161.8 pence up 18 per cent. In addition, the strategic targets were met in part resulting in bonuses, as detailed in the table on page 58, being awarded to the Executive Directors. These payments represent 106.5 per cent of the Chief Executive’s and Finance Director’s base salary and 84.8 per cent in respect of the other Executive Directors. Cash bonuses were also earned by other senior managers for achieving relevant performance targets for the financial year. Any bonus earned up to 100 per cent of base salary for the Chief Executive and Finance Director and 75 per cent for other Executive Directors is paid in cash and is eligible for investment into the Share Matching Scheme as detailed below. Any bonus payable in excess of this level is paid in ordinary shares which the Director is required to retain for a minimum of three years. These ordinary shares are not eligible for investment in the Share Matching Scheme. For the financial year ending 30 September 2010, the Committee has determined that the maximum annual bonus will increase to 150 per cent and 135 per cent of base salary for the Chief Executive and Finance Director respectively (both 125 per cent previously), 135 per cent of base salary for the Chief Operating Officer (previously 100 per cent) and 120 per cent for the Group Sales and Marketing Director (100 per cent previously). Additional stretching and quantifiable performance targets, aligned to the Company’s growth strategy, will accompany the change in maximum bonus opportunity. The bonus increment will be deliverable only in deferred shares that the Executive Director must retain for at least three years. These deferred shares are non-matchable and are not eligible for investment in the Share Matching Scheme. The higher bonus opportunity remains below the market norms for FTSE 50 companies of similar size and complexity to Imperial Tobacco, which are generally in the range of 150 per cent to 200 per cent of base salary. In support of the Group’s key performance indicators, as set out on pages 14 and 15, the Committee has determined that, for the financial year ending 30 September 2010, up to 100 per cent of salary (85 per cent for the Group Sales and Marketing Director) can be earned for achieving financial targets based on a matrix including growth in adjusted earnings per share and reduction of adjusted net debt. The remainder of the annual bonus can be earned for performance against other stretching, quantifiable targets, in important strategic areas such as volume growth. No element of the bonus is guaranteed. Share Matching Scheme (SMS) Under the SMS, at the discretion of the Remuneration Committee, the Executive Directors and the majority of the Group’s management are invited to invest any proportion of their gross bonus (capped at 100 per cent of base salary for the Chief Executive and Finance Director and 75 per cent for other Executive Directors) in our shares. For the financial year ending 30 September 2010 the cap will be 100 per cent of base salary for the Chief Executive, Finance Director and Chief Operating Officer and 85 per cent for the Group Sales and Marketing Director. The shares are held by a nominee administered by the Employee Benefit Trust. Provided the shares lodged are left with the nominee for three years and the participant remains an employee within the Group, they will be matched on a one for one basis. Employees can exercise their vote in respect of shares held in the nominee by giving written instructions to the nominee. In respect of investments made by Executive Directors under the SMS a performance criterion is applied such that matching only occurs if the Group has achieved real average annual EPS growth in excess of three per cent after adjusting for UK inflation (Real Annual EPS Growth) over the three year retention period. Measurement of the performance criterion is based on the same protocol as that applying to the LTIP. There is no opportunity to re-test if the performance criterion is not met. In setting the performance criterion for SMS awards, we have decided the EPS criterion reflects our strategy to create sustainable shareholder value. For the financial year ending 30 September 2010 we have extended the performance criterion to apply to matching shares in respect of the Chief Executive’s Committee. Under the rules, should Imperial Tobacco Group PLC be acquired the performance period would end on the date of acquisition. Any outstanding awards would vest on a time pro rata basis subject to the achievement of the applicable performance criterion.

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EXECUTIVE DIRECTORS’ CONTINGENT RIGHTS TO SHARES UNDER THE SHARE MATCHING SCHEME (AUDITED)

Market price Prevailing at date of Amount share price at Vested vesting realised on Balance at Contingent date of grant during 15/2/2009 vesting Balance at Actual/expected 1/10/2008 rights arising £ year £ £’000 30/9/20091 vesting date Mr G Davis 35,885 – 15.481 (35,885) 17.70 635 – February 2009 23,323 – 19.402 –––23,323 February 2010 37,859 – 21.183 –––37,859 February 2011 – 52,741 17.804 –––52,741 February 2012 97,067 52,741 – (35,885) – 635 113,932 Mr R Dyrbus 22,768 – 15.481 (22,768) 17.70 403 – February 2009 14,800 – 19.402 –––14,800 February 2010 24,030 – 21.183 –––24,030 February 2011 – 32,303 17.804 –––32,303 February 2012 61,598 32,303 – (22,768) – 403 71,133 Mr G L Blashill 12,114 – 15.481 (12,114) 17.70 214 – February 2009 10,597 – 19.402 –––10,597 February 2010 13,262 – 21.183 –––13,262 February 2011 – 17,684 17.804 –––17,684 February 2012 35,973 17,684 – (12,114) – 214 41,543 Mrs A J Cooper 11,308 – 15.481 (11,308) 17.70 200 – February 2009 8,804 – 19.402 –––8,804 February 2010 11,366 – 21.183 –––11,366 February 2011 – 17,895 17.804 –––17,895 February 2012 31,478 17,895 – (11,308) – 200 38,065

1 Award granted 15 February 2006. Share price on date of grant adjusted from £17.52 following June 2008 rights issue. 2 Award granted 15 February 2007. Share price on date of grant adjusted from £21.96 following June 2008 rights issue. 3 Award granted 15 February 2008. Share price on date of grant adjusted from £23.97 following June 2008 rights issue. 4 Award granted 15 February 2009. There have been no changes in any Executive Directors’ contingent rights since 30 September 2009. During February 2009 annual bonuses earned in the financial year to 30 September 2005 and lodged under the SMS for a three year period matured, providing matched shares for participants on a one for one basis. In respect of annual bonuses earned in the financial year to 30 September 2008 and paid in December 2008, the Executive Directors elected, in February 2009, to invest their entire bonus in the form of our shares under the SMS. These will be matched on a one for one basis provided they are left in the SMS for three years, the participant remains an employee within the Group and the Company has achieved in excess of three per cent Real Annual EPS Growth over the retention period. This performance criterion and the award policy and vesting schedules were reviewed by the Committee during the year and deemed to remain appropriate. These matched shares are shown within contingent rights arising above. It is anticipated that in February 2010 the Executive Directors will again invest their entire eligible annual bonus in the SMS. Long Term Incentive Plan (LTIP) Annual conditional awards are made under the LTIP to Executive Directors and other senior management. These awards vest three years after grant and are subject to satisfying the appropriate performance criteria over the relevant three year performance period. All grants are at the discretion of the Remuneration Committee and no employee has a right to receive an award. Awards granted prior to November 2005 were equivalent to 75 per cent of base salary for all Executive Directors and at a lower level for other senior management. Following the comprehensive remuneration review in 2004, and subsequent shareholder approval at the 2005 AGM, awards made in November 2005, November 2006, October 2007 and November 2008 were equivalent to 200 per cent of base salary for the Chief Executive, 150 per cent for the Finance Director and 100 per cent for the other Executive Directors with awards at a lower level for other senior management. Current Structure From November 2005 the performance criteria for all awards were split into three elements. The Remuneration Committee reviewed the performance criteria at its meeting in September 2009 and were satisfied that they remain appropriate notwithstanding current market conditions. The three elements are as follows: First Element Fifty per cent of the award has a performance criterion based on average growth in adjusted earnings per share based on an agreed protocol (EPS), after adjusting for inflation over the period of the award. At the Remuneration Committee’s request, our Auditors perform agreed upon procedures on the calculations. Twelve and a half per cent of this element (i.e. 6.25 per cent of the total award)

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vests if Real Annual EPS Growth equals three per cent and 100 per cent of this element (i.e. 50 per cent of the total award) vests if Real Annual EPS Growth equals or exceeds 10 per cent. Between these two points this element vests on a straight-line basis. Second Element Twenty five per cent of the award has a performance criterion based on total shareholder return (TSR) relative to the FTSE 100 Index as described below. The performance criterion for this element is based on a sliding scale depending on TSR achieved over the relevant period. No vesting of this element occurs unless the Company’s TSR ranks it in the top 50 of the companies of the FTSE 100 Index. At this performance threshold 30 per cent of this element (i.e. 7.5 per cent of the total award) vests. If the return ranks the Company in the top 25 of the Index this element (i.e. 25 per cent of the total award) vests in full. Between these thresholds this element vests on a straight-line basis. Third Element Twenty five per cent of the award has a performance criterion based on TSR relative to a bespoke comparator group as described below. The performance criterion for this element is also based on a sliding scale depending on TSR achieved over the relevant period. No vesting of this element occurs unless the Company’s TSR exceeds that of the bottom six companies constituting a comparator group comprising 12 tobacco and alcohol companies as detailed below. At this performance threshold, 30 per cent of this element (i.e. 7.5 per cent of the total award) vests. If the return ranks the Company in the top three of the comparator group, this element (i.e. 25 per cent of the total award) vests in full. Between these thresholds this element vests on a straight-line basis. The comparator group for the November 2009 award is: AB InBev Altria Group Inc. British American Tobacco PLC Carlsberg A/S Diageo PLC Heineken N.V. Imperial Tobacco Group PLC Japan Tobacco Inc. Philip Morris International Inc. Pernod Ricard S.A. Reynolds American Inc. SABMiller PLC

During the year Hewitt New Bridge Street was instructed to review the methodology used in the TSR calculations and submit recommendations for consideration. The review was undertaken to ensure that relative TSR is measured in a fair and equitable way and, as far as possible, reflects the underlying performance of each company within the comparator group. In particular, the revised methodology focuses on the bespoke comparator group which, due to its size, is highly sensitive to small differences in TSR. The principal changes approved by the Remuneration Committee were: – if a company within the bespoke comparator group is delisted during the performance period it will be replaced from the start of the performance period, in an agreed order, by a substitute company from a pre-determined list of Lorillard Inc, Foster’s Group Limited and Molson Coors Brewing Company; – if any company in the comparator group undertakes a rights issue during the performance period a cash neutral approach of selling a portion of rights to take up the balance of the rights (commonly known as ‘tail swallowing’) will be applied; and – to remove the undue influence of changes in exchange rates, future TSR calculations will be measured in the currency in which each company is listed. These changes were deemed necessary to ensure our Executive Directors and senior managers are incentivised to drive our underlying performance and to ensure that corporate actions or fluctuations in exchange rates do not unduly effect comparative underlying performance. The TSR calculations use share prices of each comparator group company averaged over a period of three months to determine the initial and closing prices rather than those applying on a single day. It is assumed that the cash flow of dividend payments is recognised on the date shares are declared ex dividend. This method is considered to give a fairer and less volatile result as improved performance has to be sustained for several weeks before it effectively impacts on the TSR calculations. The TSR calculations are performed independently by Alithos Limited. Each element operates independently and is capable of vesting regardless of the Company’s performance in respect of the other elements. During the year the Remuneration Committee reviewed the performance criteria, award policy, comparator group and vesting schedules for LTIP awards and decided that, notwithstanding the current conditions in financial markets, the three elements remain the most important measures that drive and measure sustainable improvement in shareholder value and support our longer-term KPIs discussed on pages 14 and 15. The TSR criteria reflect comparative performance against the appropriate FTSE sector and the bespoke comparator group of companies. The EPS criterion reflects a key part of the Group’s strategy to create sustainable shareholder value. Awards Under the Historical Structure For awards granted between December 2000 and November 2004, EPS growth was the sole performance criterion. This was seen as focusing on the financial performance of the business, over which Executive Directors and senior management could exercise influence. These awards vested on a sliding scale depending on average growth in basic EPS adjusted under the terms of the relevant protocol. The EPS calculations were confirmed by the Auditors. For awards granted between 2000 and 2002 no vesting occurred unless the Company’s Real Annual EPS Growth was positive. For awards granted in 2003 and 2004 no vesting occurred unless the Company’s Real Annual EPS Growth exceeded three per cent. Full vesting occurred if Real Annual EPS Growth was equal to or exceeded 10 per cent. Between these two points the awards vested on a straight-line basis.

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Vesting of Awards On vesting, a participant is granted an option to acquire the relevant number of shares. The option may be exercised at any time up to the seventh anniversary of its date of grant. Within this framework the vesting process in a number of jurisdictions outside the UK is amended to conform to local securities and tax legislation. The performance periods are set prior to the granting of each annual award and there is no opportunity to re-test if any of the performance criteria are not achieved. Under the rules, should Imperial Tobacco Group PLC be acquired the performance period would end on the date of acquisition. Any outstanding awards would vest on a time pro rata basis subject to the achievement of applicable performance criteria. The Remuneration Committee has absolute discretion to vary, but not increase, the extent to which any awards vest. This ensures awards only vest, and vest at an appropriate level, if there has been an improvement in the underlying financial performance of the Company, including the maintenance of long-term return on capital employed.

AWARD SUMMARY

Award Years Award as Percentage of Base Salary Performance Criteria 1996 – 1999 75 for all Executive Directors 100 per cent on TSR 2000 – 2004 75 for all Executive Directors 100 per cent on EPS 2005 onwards 200 for Chief Executive 50 per cent on EPS 150 for Finance Director 25 per cent on TSR against FTSE 100 100 for other Executive Directors 25 per cent on TSR against comparator group

EXECUTIVE DIRECTORS’ CONDITIONAL SHARE AWARDS UNDER THE LONG TERM INCENTIVE PLAN (AUDITED)

Market Market Market price at Vested price at price at Amount Performance Granted date of during date of date of Lapsed realised on period Balance at during Date of grant year vesting exercise during exercise Balance at November– 1/10/2008 year grant £ (25/11/2008) ££year £’000 30/9/2009 November Mr G Davis 111,170 – 02/11/05 16.15 (73,734) 15.77 16.58 (37,436) 1,223 – 2005-20081 103,499 – 01/11/06 18.57 ––– – –103,499 2006-20092 88,308 – 31/10/07 24.47 ––– – –88,308 2007-20103 – 140,544 26/11/08 14.70 ––– – –140,544 2008-20114 302,977 140,544 – (73,734) ––(37,436) – 332,351 Mr R Dyrbus 52,912 – 02/11/05 16.15 (35,094) 15.77 16.58 (17,818) 582 – 2005-20081 49,270 – 01/11/06 18.57 ––– – –49,270 2006-20092 40,565 – 31/10/07 24.47 ––– – –40,565 2007-20103 – 63,571 26/11/08 14.70 ––– – –63,571 2008-20114 142,747 63,571 – (35,094) ––(17,818) – 153,406 Mr G L Blashill 25,297 – 02/11/05 16.15 (16,778) 15.77 16.58 (8,519) 278 – 2005-20081 24,170 – 01/11/06 18.57 ––– – –24,170 2006-20092 19,752 – 31/10/07 24.47 ––– – –19,752 2007-20103 – 30,952 26/11/08 14.70 ––– – –30,952 2008-20114 69,219 30,952 – (16,778) ––(8,519) – 74,874 Mrs A J Cooper 14,965 – 02/11/05 16.15 (9,926) 15.77 16.58 (5,039) 165 – 2005-20081 15,803 – 01/11/06 18.57 ––– – –15,803 2006-20092 19,988 – 31/10/07 24.47 ––– – –19,988 2007-20103 – 31,972 26/11/08 14.70 ––– – –31,972 2008-20114 50,756 31,972 – (9,926) ––(5,039) – 67,763

1 Exercisable, upon the payment of the option exercise price of 1 penny, between 25 November 2008 and 24 November 2015. 2 Exercisable, upon the payment of the option exercise price of 1 penny, between 11 November 2009 and 10 November 2016. 3 Exercisable, upon the payment of the option exercise price of 1 penny, between 1 November 2010 and 31 October 2017. 4 Exercisable, upon the payment of the option exercise price of 1 penny, between 27 November 2011 and 26 November 2018. There have been no changes in any Executive Directors’ awards since 30 September 2009, other than the vesting of the November 2006 – November 2009 award detailed below. During the year, the November 2005 – November 2008 award vested partially. Based on EPS and TSR performance to the end of the financial year partial vesting of 93.9 per cent of the first element, 77.6 per cent of the second element and none of the third element vested on 25 November 2008. The remaining shares under award lapsed.

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In respect of the November 2006 – November 2009 award partial vesting occured on 10 November 2009. Based on EPS and TSR performance to the end of the financial year, full vesting of the first and second elements and partial vesting of 76.7 per cent of the third element vested. For illustrative purposes only, the share price on 6 November 2009, being the latest practicable date prior to publication, was £18.23 valuing the awards as follows: Award vesting Award vesting Award lapsing No. of shares over Illustrative value No. of shares which option granted £’000 Mr G Davis 6,038 97,461 1,777 Mr R Dyrbus 2,874 46,396 846 Mr G L Blashill 1,410 22,760 415 Mrs A J Cooper 922 14,881 271 The value of any options exercised could vary significantly from that shown due to share price movements. The Remuneration Committee regards the November 2007 – November 2010 and the November 2008 – November 2011 awards to be too distant from maturity to be included in the value projected above. However, in respect of the November 2007 – November 2010 award, based upon interim measurement calculations prepared as at 30 September 2009 full vesting of the first element, partial vesting of 93.9 per cent of the second element and 53.3 per cent of the third element would occur if this performance were maintained over the relevant performance period. In respect of the November 2008 – November 2011 award based upon interim measurement calculations prepared as at 30 September 2009 full vesting of the first element, no vesting of the second element and 53.3 per cent of the third element would occur if this performance were maintained over the relevant performance period. The illustrative values based on the above share price and performance criteria are as follows: Illustrative awards vesting November 2010 November 2011 Illustrative value Illustrative value No. of shares £’000 No. of shares £’000 Mr G Davis 76,658 1,397 89,011 1,623 Mr R Dyrbus 35,214 642 40,262 734 Mr G L Blashill 17,147 313 19,602 357 Mrs A J Cooper 17,351 316 20,248 369 Evidence of the Group’s sustained performance on a TSR basis when compared with the FTSE 100 Index is set out below. TOTAL RETURN INDICES – IMPERIAL TOBACCO AND FTSE 100

200

150 Imperial Tobacco

100 FTSE 100

0 Sept 04 Sept 05 Sept 06 Sept 07 Sept 08 Sept 09

We view the FTSE 100 Index as providing the most appropriate and widely recognised index for benchmarking our corporate performance, which is a constituent of that index, and reflects the benchmark index used as an LTIP performance criterion.

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Share Options The Company does not operate an executive share option scheme. Executive Directors are, however, eligible (along with all employees of the Company and participating subsidiaries of the Group, where possible) to participate in our savings related Sharesave Plan. Under this Plan options are granted to participants who have contracted to save up to £250 per month over a period of three or five years at a discount of up of 20 per cent to the closing mid-market price of an Imperial Tobacco Group PLC ordinary share on the London Stock Exchange on the day prior to invitation. In common with most plans of this type there are no performance conditions applicable to options granted under this Plan. EXECUTIVE DIRECTORS’ SHARE OPTIONS (AUDITED)

Market price at date of Exercise exercise price Range of 3 30/1/2009 (rebased exercisable Gains on exercise Granted Lapsed Exercised and Balance where dates of During Balance at during during during 3/8/20091 at appropriate) options held at the year 2008 1/10/2008 the year the year the year £ 30/9/20091 £ 30/9/20092 £’000 £’000 Mr G Davis 656 ––––656 14.96 01/08/12 – 31/01/13 –– 214 – (214) ––– 17.50 01/08/11 – 31/01/12 –– – 291 –––291 12.54 01/08/12 – 31/01/13 –– 870 291 (214) ––947 ––10 Mr R Dyrbus 462 ––(462) 17.11 – 12.12 01/08/09 – 31/01/10 2– 252 ––––252 14.96 01/08/10 – 31/01/11 –– – 437 –––437 12.54 01/08/12 – 31/01/13 –– 714 437 – (462) – 689 –2– Mr G L Blashill 928 ––(928) 18.59 – 10.19 01/08/08 – 31/01/09 8– 537 – (537) ––– 17.50 01/08/11 – 31/01/12 –– – 729 –––729 12.54 01/08/12 – 31/01/13 –– 1,465 729 (537) (928) – 729 –8– Mrs A J Cooper 771 ––(771) 17.11 – 12.12 01/08/09 – 31/01/10 4– – 729 –––729 12.54 01/08/12 – 31/01/13 771 729 – (771) – 729 –4–

1 Mr G L Blashill exercised on 30 January 2009 and Mr R Dyrbus and Mrs A J Cooper exercised on 3 August 2009. 2 Any option not exercised by the end of the range of exercisable dates will expire. 3 Gains made on exercise, calculated as the difference between the exercise price and the market price on the date of exercise. Aggregate gains during the year were £13,948 (2008: £10,226). There have been no changes in any Executive Directors’ share options since 30 September 2009. Our middle market share price at the close of business on 30 September 2009, being the last trading day of the financial year, was £18.08 and the range of the middle market price during the year was £14.30 to £19.40. Full details of the Directors’ share interests are available for inspection in the Register of Directors’ Interests at our registered office. Award Dates Our policy is to grant awards under all our employee share plans on predetermined dates based on an annual cycle. Executive Share Retention To ensure the interests of management are aligned with those of shareholders, Executive Directors and senior managers are required to meet minimum shareholding guidelines. Over a period of five years from appointment they are required to build a holding in the Group’s shares to a minimum value broadly equivalent to three times base salary for the Chief Executive and Finance Director and twice base salary in respect of the other Executive Directors. Other senior management are expected to invest at a level equivalent to between once and twice base salary, dependent upon grade. Failure to meet the minimum shareholding requirement is taken into account when determining eligibility for LTIP awards. All Executive Directors currently exceed their required shareholding.

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6 Executive Directors’ Pensions Since 6 April 2006 (‘A’ day) the Group’s UK pension policy, which applies to all current Executive Directors, provides the option to maintain membership of or, in respect of new employees, join the UK Imperial Tobacco Pension Fund (the Fund) or receive a salary supplement in lieu of membership of the Fund. The Executive Directors are all members of the Fund, the principal defined benefit scheme operated by the Group. For members who joined prior to 1 April 2002 the Fund is largely non-contributory with a normal retirement age of 60. The Fund allows members to achieve the maximum pension of two-thirds of their salary at normal retirement age, usually after 32 years’ service. Pension commutation to enable participants to receive a lump sum on retirement is permitted. For death before retirement, a capital sum equal to four times salary is payable together with a spouse’s pension of two-thirds of the member’s expected pension at retirement. For death in retirement, a spouse’s pension of two-thirds of the member’s pre-commutation pension is payable. Dependant children will also receive allowances. Pensions increase annually by the lesser of 10 per cent and the increase in the Retail Prices Index, together with an option under the rules to surrender part of a pension in order for the annual increase to be in line with the increase in the Retail Prices Index to a maximum of 15 per cent. From 6 April 2006 a new tax regime was introduced by HM Revenue & Customs (HMRC) which abolished most of the detailed limits previously imposed on pension schemes and replaced them with a simplified approach. Each member now has a Lifetime Allowance (LTA), £1.75 million for retirements in the tax year 2009/2010 and a tax, called the lifetime allowance charge, is levied at retirement if the value of their pension benefit from all sources exceeds this amount. For any member whose total benefit value on 6 April 2006 exceeded the LTA, transitional arrangements allowed them to register the higher value so that they would not be subject to a large retrospective LTA charge. To qualify for this enhanced protection the member was required to opt out of Fund membership in respect of future service accrual in order to retain a final salary linked pension entitlement in respect of past service. All Executive Directors earn benefits on the standard scale with a normal retirement age of 60. Other than Mrs A J Cooper, each of the current Executive Directors has opted out of Fund membership in respect of future service accrual as a result of registering for enhanced protection with HMRC. The detailed HMRC rules governing enhanced protection mean that it may not be permissible, in some rare circumstances, for the full final salary linked pension based on service up to 6 April 2006 to be paid from the Fund. In this event an additional pension will be paid by the Company through an unfunded unapproved retirement benefit scheme (UURBS) so that the full accrued benefit may be provided. Mr R Dyrbus is in receipt of a salary supplement of 35 per cent of salary, which is in lieu of future pensionable service accrual and arises because his accrued pension on 6 April 2006 was well below the maximum pension of two-thirds of salary. Mrs A J Cooper is also in receipt of a salary supplement. Prior to 6 April 2006 her pension benefits were limited by the effect of HMRC’s earnings cap. Although this cap was removed as from 6 April 2006, the Fund did not disapply it in respect of past pensionable service but maintained its own earnings cap going forward. For service from 6 April 2006 onwards and for pensionable salary in excess of the Fund’s earnings cap, the standard Fund benefit is a pension at the lower accrual rate of 1/60ths with a 50 per cent spouse’s pension and member contributions of 5 per cent of this top slice of salary are payable. As an alternative to extra pension accrual on this top slice of salary through the UURBS, Mrs Cooper receives a salary supplement of 12 per cent of this amount. In each case these salary supplements have been calculated by the independent actuaries to reflect the value of the benefits of which they are in lieu and are discounted for early payment and for employer’s national insurance contributions. The supplements are non-compensatory and non-pensionable. The following table provides the information required by both the Listing Rules and Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the Regulations) and gives details for each Executive Director of: – the annual accrued pension payable on retirement calculated as if he/she had left service at the year end (any potential UURBS entitlement is included); – the increase in accrued pension during the year, excluding any increases for inflation in respect of the disclosure required under the Listing Rules; and – the transfer value of the increase in accrued pension calculated in accordance with the Retirement Benefit Schemes – Transfer Values (GN 11) published by the Institute of Actuaries and the Faculty of Actuaries and dated 6 April 2001. None of the Executive Directors have made additional voluntary contributions.

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EXECUTIVE DIRECTORS’ PENSION DISCLOSURES (AUDITED)

Disclosures required under the Regulations Listing Rules Accrued pension £’000 Transfer value of accrued pension £’000 £’000 Increase/ Increase in (decrease) accrued during pension Transfer Pensionable the year (net of value of Age at service at Increase net of inflation) increase 30/9/2009 30/9/2009 At during At At Directors’ Director’s At during (net of Years Years 1/10/2008 the year 30/9/2009 1/10/2008 contributions contribution 30/9/2009 the year inflation) Mr G Davis 59 37 626 63 689 9,594 2,319 – 11,913 57 983 Mr R Dyrbus 56 27 291 24 315 3,972 949 – 4,921 21 337 Mrs A J Cooper 43 10 48 14 62 352 196 15 563 14 126 Mr G L Blashill1 62 41 280 17 297 4,805 793 – 5,598 15 244

1 Mr G L Blashill drew pension during the course of the year, as is permitted under the Fund rules. Mr Blashill was still in employment as at 30 September 2009. The transfer value figures in the table above incorporate allowance for the benefits paid out in order to provide a consistent comparison with previous figures. The accrued pension figures represent the benefits accrued, assuming that Mr Blashill first started to draw pension from the relevant date. The figures shown are consistent with those disclosed at 30 September 2008. 7 Other Information Employee Benefit Trusts The Imperial Tobacco Group Employee and Executive Benefit Trust (the Executive Trust) and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the 2001 Trust) (together the Employee Benefit Trusts) have been established to acquire ordinary shares and American Depositary Shares (ADSs) in the Company by subscription or purchase. Funds to enable these acquisitions are provided by the Group to satisfy rights to ordinary shares and ADSs arising on the exercise of share options and on the vesting of the SMS and LTIP awards. As at 30 September 2009, the Company held 51,481,000 ordinary shares in treasury which can be used to satisfy options and awards under its employee share plans either directly by the Company or by the Company gifting them to the Employee Benefit Trusts. Options and awards may also be satisfied by the issue of new ordinary shares. Details of the shareholdings by the Employee Benefit Trusts are as follows: Ordinary shares Balance at Acquired Distributed Balance at under Award Surplus/ 1/10/2008 during year during year 30/9/2009 at 30/9/2009 (Shortfall) Executive Trust 1,101,387 236,000 258,868 1,078,519 1,096,874 (18,355) 2001 Trust 3,804,697 – 1,374,124 2,430,573 4,820,741 (2,390,168)

Share Plan Flow Rates Our policy has always been to satisfy all options and awards under employee share plans from market purchased ordinary shares through the Employee Benefit Trusts or through treasury shares transferred to the Employee Benefit Trusts. The Trust Deeds of the Employee Benefit Trusts and the rules of all our employee share plans contain provisions limiting awards to five per cent in five years and ten per cent in ten years for all employee share plans with an additional restriction to five per cent in ten years for executive share plans. Currently an aggregate total of 0.6 per cent of the Company’s issued share capital is subject to options and awards under the Group’s executive and all employee share plans. The Employee Benefit Trusts have also been provided with ordinary shares held by the Company in treasury in order to satisfy vesting options and awards. Since demerger in 1996, the cumulative options and awards under all of the Company’s employee share plans totals 2.6 per cent of its issued share capital. Following initial grants on demerger, subsequent annual grants have averaged 0.3 per cent of issued share capital.

SUMMARY OF OPTIONS AND AWARDS GRANTED

Cumulative Options and Awards granted Options and Awards granted during the year Limit on awards as a percentage of issued share capital as a percentage of issued share capital 10% in 10 years 2.0 0.3 5% in 5 years 0.9 0.3 5% in 10 years (executive plans) 1.2 0.2

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DIRECTORS’ REPORT: BUSINESS REVIEW: GOVERNANCE Directors’ Remuneration Report continued

Consultancy Agreement with Non-Executive Mr Painter is also a member of Supervisory Boards within the Deputy Chairman Reemtsma group and, between January and October 2008, the In addition to his appointment as Non-Executive Deputy Altadis group for which he received additional remuneration for Chairman, Mr Comolli entered into an agreement with Imperial fulfilling such non-executive roles. Tobacco Limited, the Group’s principal operating company. Dr F A Rogerson Under this agreement he provides consultancy services to the Dr F A Rogerson resigned as a Director on 27 June 2007 for Group and receives fees up to a maximum of €850,000 per annum. personal and private reasons. Under his contract of employment, Dr Rogerson was required to give 12 months’ notice to terminate The agreement terminates on 31 January 2010 but may be his employment. Dr Rogerson completed a handover period and renewed by mutual consent for further one year periods. In the was on compassionate leave until 27 June 2008, when his event that Mr Comolli ceases to be Non-Executive Deputy employment terminated. Chairman, the agreement terminates with immediate effect but Mr Comolli would receive fees for the remainder of the relevant Dr Rogerson was excluded from the 2007/2008 bonus scheme one year period. and did not receive any bonus payment in respect of that bonus year. He was also excluded from any invitations to the LTIP and It has been agreed that the annual consultancy agreement will SMS from his Board resignation date. not be renewed on 31 January 2010, but will be replaced with an eight month agreement paid at the rate of €20,000 per month. The Remuneration Committee agreed that the awards granted to The agreement will terminate at the end of September 2010 at Dr Rogerson under the LTIP and the ordinary shares awarded to which time Mr Comolli will cease to provide consultancy services him under the SMS would vest, to the extent that the applicable to the Group. These changes do not have any impact on performance conditions were satisfied, pro rata for the period up Mr Comolli’s appointment as Non-Executive Deputy Chairman. to 31 December 2007. Remuneration Arrangements for Former No compensation has been paid to Dr Rogerson in connection Executive Directors with the termination of his employment. Mr D Cresswell Dr Rogerson opted out of pension fund membership as Following his retirement from the Board in December 2007, regards future service accrual as a result of registering for Mr Cresswell remains a member of Supervisory Boards within enhanced protection with HMRC from 6 April 2006. Dr Rogerson the Reemtsma group and the Board of Imperial Vina Danang was in receipt of a salary supplement in lieu of future pension Company Limited. service accrual of 16.4 per cent of salary. This amount was a Mr M A Häussler non-pensionable payment. It was agreed with Dr Rogerson that Mr M A Häussler is currently in receipt of a retirement pension this salary supplement ceased to be paid on 31 December 2007 that has been reduced because it was taken before he reached and that no salary supplement would be paid for the remainder his normal retirement age. His service agreement with the Group of his notice period. provided that he would receive similar overall pension benefits to those that he would have received had he remained in the Mr B Setrakian Following his appointment to the Board in June 2008, Reemtsma Cigarettenfabriken GmbH pension arrangement. Mr B Setrakian retained a number of appointments within This was a pension for life equivalent to 42 per cent of his fixed Altadis’ USA business. He resigned from these appointments in annual salary at age 63. For death in retirement, a spouse’s December 2008. Mr Setrakian received additional remuneration pension for life of 60 per cent of that amount would be payable. for fulfilling such non-executive roles. The pension is made up of two parts: one part payable from the unfunded pension arrangement of Reemtsma Cigarettenfabriken For the Board GmbH, the other part payable from the separately funded Imperial Tobacco Pension Fund. The pension payable under the Reemtsma arrangement and from the Imperial Tobacco Pension Fund may be increased annually in accordance with the Rules of those arrangements, or as required by law. Mr S Huismans P H Jungels Following his retirement from the Board in January 2006, Chairman of the Remuneration Committee Mr S Huismans remains a member of Supervisory Boards within 10 November 2009 the Reemtsma group. He was also appointed as a non-executive director of Altadis, S.A. upon its acquisition by the Group in January 2008 until 5 November 2008. Mr Huismans received additional remuneration for fulfilling such non-executive roles. Mr S T Painter Following his retirement in May 2000, Mr S T Painter entered into a consultancy agreement with Imperial Tobacco Limited, the Group’s principal operating company. The agreement, as amended in October 2001 and May 2004, ran until March 2007. Under the terms of the agreement he provided consultancy services as required and received fees at a day rate of £1,000 with a minimum fee based on 100 days’ service for each 12 month period ending on 30 June, and 67 days for the period 1 July 2006 to 6 March 2007. Mr Painter is still providing consultancy services as required and receives fees at a day rate of £1,000. However, there is now no minimum fee. He is entitled to reimbursement for the use of his car.

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01 02 4 FINANCIAL STATEMENTS

In this section: 73 Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC 74 Consolidated Income Statement 75 Consolidated Balance Sheet 76 Consolidated Statement of Recognised Income and Expense 76 Consolidated Cash Flow Statement 77 Accounting Policies 03 83 Critical Accounting Estimates and Judgements 85 Notes to the Financial Statements 127 Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC 128 Imperial Tobacco Group PLC Balance Sheet 129 Notes to the Imperial Tobacco Group PLC Balance Sheet

Total Tobacco 01 JPS Dosettes, launched in 2008, is a make your own product. 02 Lambert & Butler supports our market leading position in the UK. 03 USA Gold continues to be well positioned in the USA discount sector.

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FINANCIAL STATEMENTS Financial Statements and Notes – Contents

Page Page Independent Auditors’ Report to the 14 Cash and Cash Equivalents 97 Members of Imperial Tobacco Group PLC 73 15 Trade and Other Payables 97 Consolidated Income Statement 74 16 Borrowings and Derivative Consolidated Balance Sheet 75 Financial Instruments 98 Consolidated Statement of Recognised 17 Deferred Tax Assets and Liabilities 111 Income and Expense 76 18 Retirement Benefit Schemes 113 Consolidated Cash Flow Statement 76 19 Provisions 116 Accounting Policies 77 20 Share Capital 116 Critical Accounting Estimates and Judgements 83 21 Share Schemes 117 22 Changes in Equity 121 Notes to the Financial Statements 23 Minority Interests 122 24 Acquisitions 122 1 Segmental Information 85 25 Commitments 124 2 Profit Before Taxation 88 26 Legal Proceedings 124 3 Restructuring Costs 89 27 Cash Flows from Operating Activities 125 4 Directors and Employees 89 28 Analysis of Net Debt 125 5 Net Finance Costs 90 29 Reconciliation of Cash Flow to Movement 6 Taxation 90 in Net Debt 126 30 Balances and Transactions with 7 Dividends 91 Associates and Joint Ventures 126 8 Earnings Per Share 92 9 Intangible Assets 93 Independent Auditors’ Report to the 10 Property, Plant and Equipment 95 Members of Imperial Tobacco Group PLC 127 11 Investments in Associates Imperial Tobacco Group PLC Balance Sheet 128 and Joint Ventures 96 Notes to the Imperial Tobacco Group PLC 12 Inventories 97 Balance Sheet 129 13 Trade and Other Receivables 97 Principal Subsidiaries 131

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Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC

We have audited the Group financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2009 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Recognised Income and Expense, the Consolidated Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective Responsibilities of Directors and Auditors As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Sections 495 and 496 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Opinion on Financial Statements In our opinion the Group financial statements: – give a true and fair view of the state of the Group’s affairs as at 30 September 2009 and of its profit and cash flows for the year then ended; – have been properly prepared in accordance with IFRSs as adopted by the European Union; and – have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation. Opinion on Other Matter Prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the Group financial statements are prepared is consistent with the Group financial statements. Matters on Which We Are Required to Report by Exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: – certain disclosures of directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit; or – a corporate governance statement has not been prepared by the parent company. Under the Listing Rules we are required to review: – the Directors’ statement in the Corporate Governance Report, in relation to going concern; and – the part of the Corporate Governance Report relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review. Other Matter We have reported separately on the parent company financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2009 and on the information in the Directors’ Remuneration Report that is described as having been audited.

David Charles (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol 10 November 2009

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FINANCIAL STATEMENTS Consolidated Income Statement for the year ended 30 September 2009

Year ended Year ended 30 September 30 September In £s million unless otherwise indicated Notes 2009 2008 Revenue 1 26,517 20,528 Duty and similar items (11,769) (10,412) Other cost of sales (9,432) (6,253) Cost of sales (21,201) (16,665) Gross profit 5,316 3,863 Distribution, advertising and selling costs (1,979) (1,462) Administrative and other expenses (1,000) (930) Profit from operations 1 2,337 1,471 Investment income 5 1,180 543 Finance costs 5 (2,572) (1,393) Net finance costs 5 (1,392) (850) Profit before taxation 2 945 621 Taxation 6 (268) (180) Profit for the year 677 441 Attributable to: Equity holders of the Company 663 428 Minority interests 14 13 Earnings per ordinary share (pence) – Basic 8 65.5 50.6 – Diluted 8 65.3 50.4 All activities derive from continuing operations. Reconciliation from profit from operations to adjusted profit from operations Year ended Year ended 30 September 30 September In £s million Notes 2009 2008 Profit from operations 2,337 1,471 Acquisition accounting adjustments – 161 Amortisation of acquired intangibles 9 451 309 Brand divestment gain – (174) Restructuring costs 3 145 463 Adjusted profit from operations 2,933 2,230

Reconciliation from net finance costs to adjusted net finance costs Year ended Year ended 30 September 30 September In £s million Notes 2009 2008 Net finance costs (1,392) (850) Fair value gains and losses on derivative financial instruments providing commercial hedges 5 660 272 Post-employment benefits net financing cost/(income) 5 32 (45) Adjusted net finance costs (700) (623)

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Consolidated Balance Sheet at 30 September 2009

30 September 30 September In £s million Notes 2009 2008 Non-current assets Intangible assets 9 22,357 19,817 Property, plant and equipment 10 2,010 1,820 Investments in associates 11 22 16 Retirement benefit assets 18 17 441 Trade and other receivables 13 99 98 Derivative financial instruments 16 9 76 Deferred tax assets 17 148 392 24,662 22,660 Current assets Inventories 12 2,925 2,858 Trade and other receivables 13 3,011 2,951 Current tax assets 6 52 31 Cash and cash equivalents 14 1,036 642 Derivative financial instruments 16 239 97 7,263 6,579 Total assets 31,925 29,239 Current liabilities Borrowings 16 (2,560) (2,678) Derivative financial instruments 16 (564) (238) Trade and other payables 15 (7,451) (6,183) Finance lease liabilities 28 (2) (2) Current tax liabilities 6 (551) (370) Provisions 19 (292) (187) (11,420) (9,658) Non-current liabilities Borrowings 16 (9,507) (9,558) Derivative financial instruments 16 (669) (2) Trade and other payables 15 (23) (14) Finance lease liabilities 28 (26) (24) Deferred tax liabilities 17 (2,098) (2,310) Retirement benefit liabilities 18 (811) (546) Provisions 19 (776) (771) (13,910) (13,225) Total liabilities (25,330) (22,883) Net assets 6,595 6,356 Equity Share capital 20 107 107 Share premium account 22 5,833 5,833 Retained earnings 22 (469) (109) Exchange translation reserve 22 1,067 476 Equity attributable to equity holders of the Company 6,538 6,307 Minority interests 23 57 49 Total equity 6,595 6,356 The financial statements on pages 74 to 130 were approved by the Board of Directors on 10 November 2009 and signed on its behalf by:

Iain Napier Robert Dyrbus Chairman Director

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FINANCIAL STATEMENTS Consolidated Statement of Recognised Income and Expense for the year ended 30 September 2009

Year ended Year ended 30 September 30 September In £s million Notes 2009 2008 Exchange movements 22 703 541 Net actuarial losses on retirement benefits 22 (582) (156) Deferred tax relating to net actuarial losses on retirement benefits 22 173 57 Deferred tax on share-based payments 22 (3) (6) Current tax on share-based payments 22 2 1 Current tax on exchange movements 22 (112) (88) Net income recognised directly in equity 181 349 Profit for the year 677 441 Total recognised income and expense for the year 858 790

Attributable to: Equity holders of the Company 844 777 Minority interests 23 14 13 Total recognised income and expense for the year 858 790

Consolidated Cash Flow Statement for the year ended 30 September 2009

Year ended Year ended 30 September 30 September In £s million Notes 2009 2008 Cash flows from operating activities 27 3,569 1,700

Cash flows from investing activities Interest received 57 101 Purchase of property, plant and equipment (245) (214) Proceeds from sale of property, plant and equipment 69 34 Purchase of intangible assets – software (8) (12) Purchase of intangible assets – trademarks and supply agreements (4) (5) Proceeds from brand divestment – 191 Purchase of businesses – net of cash acquired 24 (46) (9,642) Proceeds from sale of businesses – net of cash disposed – 222 Net cash used in investing activities (177) (9,325)

Cash flows from financing activities Interest paid (562) (608) Proceeds from sale of shares by Employee Share Ownership Trusts 6 5 Purchase of shares by Employee Share Ownership Trusts – (26) Proceeds from rights issue – 4,903 Settlement of exchange rate derivative financial instruments (5) 13 Increase in borrowings 4,324 13,815 Repayment of borrowings (6,042) (9,646) Increase in collateralisation deposits (125) (188) Repayment of obligations under finance leases (2) (1) Dividends paid to minority interests (12) (9) Dividends paid to equity holders of the Company (640) (487) Net cash (used in)/generated by financing activities (3,058) 7,771

Net increase in cash and cash equivalents 334 146 Cash and cash equivalents at start of year 642 380 Effect of foreign exchange rates on cash and cash equivalents 60 116 Cash and cash equivalents at end of year 1,036 642

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Accounting Policies

Basis of Preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations as adopted by the European Union (collectively IFRS) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention except as described in the accounting policies on financial instruments, retirement benefit schemes and share schemes below. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, assets and liabilities, and the disclosure of contingent liabilities at the date of the financial statements. The key estimates and assumptions are set out in the Critical Accounting Estimates and Judgements note on pages 83 to 84. Such estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable in the circumstances and constitute management’s best judgement at the date of the financial statements. In the future, actual experience may deviate from these estimates and assumptions. This could affect future financial statements as the original estimates and assumptions are modified, as appropriate, in the year in which the circumstances change. A summary of the more important Group accounting policies is set out below. Consolidated Income Statement Presentation Since the Group adopted IFRS in 2005, the audited consolidated financial statements of the Group were consistently prepared on the basis that: (a) the foreign currency exchange element of changes in the fair value of derivative financial instruments not designated as net investment hedges under IAS 39 was reported as part of profit from operations; (b) foreign currency exchange differences on borrowings not designated as net investment hedges under IAS 39 were also taken to profit from operations, but were not separately disclosed; and (c) the interest element of changes in the fair value of derivatives was reported as part of net finance costs. During the year, as part of our ongoing procedures to improve the quality of our financial reporting, we reviewed our Consolidated Income Statement presentation in the light of current best practice and against those members of our peer group reporting under IFRS. On the basis of this review we concluded that it would be more helpful to users of our financial statements to present the foreign exchange element of changes in value of derivative financial instruments and foreign currency exchange differences on borrowings not designated as net investment hedges as part of net finance costs rather than profit from operations. For the year ended 30 September 2008 an amount of £314 million has been reclassified from administrative and other expenses to net finance costs. There was no effect on profit before taxation. Consolidated Balance Sheet As detailed in note 24, the fair value adjustments arising from the acquisition of Altadis were finalised in January 2009, with adjustments made to the previously published provisional fair values. The consolidated balance sheet at 30 September 2008 has been restated to reflect the finalisation of the fair value adjustments. Basis of Consolidation The consolidated financial statements comprise the results of Imperial Tobacco Group PLC (the Company) and its subsidiary undertakings. Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an enterprise taking into account any potential voting rights. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the consideration plus costs directly attributable to the acquisition. The excess of the cost of the acquisition over the Group’s share of the fair value of the net identifiable assets of the subsidiary acquired is recorded as goodwill. Transactions with minority interests are treated as transactions with parties external to the Group. Intragroup transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless costs cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. A list of the principal subsidiaries is included on pages 131 to 132. Joint Ventures Joint ventures are those businesses which management and third parties jointly control. The financial statements of joint ventures are consolidated using the proportionate method, with the Group’s share of assets and liabilities recognised in the balance sheet classified according to their nature. In the same way, the Group’s share of income and expenses is presented in the consolidated income statement in accordance with their function. If necessary, adjustments are made to the financial statements of these companies to unify their accounting policies with those used by the Group. Foreign Currency Items included in the financial statements of each Group company are measured using the currency of the primary economic environment in which the company operates (the functional currency). The income and cash flow statements of Group companies using non-sterling functional currencies are translated to sterling (the Group’s presentational currency) at average rates of exchange in each period. Assets and liabilities of these companies are translated at rates of exchange ruling at the balance sheet date. The differences between retained profits and losses translated at average and closing rates are taken to reserves, as are differences arising on the retranslation of the net assets at the beginning of the year.

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FINANCIAL STATEMENTS Accounting Policies continued

Any translation differences that have arisen since 1 October 2004 are presented as a separate component of equity. As permitted by IFRS 1, any differences prior to this date are not included in this separate component of equity. Transactions in currencies other than a company’s functional currency are initially recorded at the exchange rate ruling at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at exchange rates ruling at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when treated as qualifying net investment hedges. The Group designates as net investment hedges certain external borrowings and derivatives up to the value of the net assets of Group companies that use non-sterling functional currencies after deducting permanent intragroup loans. Gains or losses on these hedges are transferred to equity and offset any gains or losses on translation of the net assets. Revenue Recognition For the Tobacco segment, revenue comprises the invoiced value for the sale of goods and services net of sales taxes, rebates and discounts. Revenue from the sale of goods is recognised when a Group company has delivered products to the customer, the customer has accepted the products and collectibility of the related receivables is reasonably assured. Sales of services, which include fees for distributing third party products, are recognised in the accounting period in which the services are rendered. Licence fees are recognised on an accruals basis in accordance with the substance of the relevant agreements. For the Logistics segment, revenue comprises the invoiced value for the sale of goods and services net of sales taxes, rebates and discounts. The Logistics business only recognises commission revenue on purchase and sale transactions in which it acts as a commission agent. Distribution and marketing commissions are included in revenue. Revenue is recognised on products on consignment when these are sold by the consignee. Duty and Similar Items Duty and similar items includes duty and levies having the characteristics of duty. In countries where duty is a production tax, duty is included in revenue and in the income statement as an expense. Where duty is a sales tax, duty is excluded from revenue. Payments due in the United States under the Master Settlement Agreement and the Fair and Equitable Tobacco Reform Act are considered to be levies having the characteristics of duty and are treated as a production tax. Taxes Tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Management periodically evaluates positions taken in tax returns where the applicable tax regulation is subject to interpretation. The Group establishes provisions on the basis of amounts expected to be paid to the tax authorities only where it is considered more likely than not that an amount will be paid or received. The Group applies this test to each individual uncertain position. The Group measures the uncertain positions based on the single most likely outcome. Deferred tax is provided in full on temporary differences between the carrying amount of assets and liabilities in the financial statements and the tax base. However, the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be realised. Deferred tax assets and liabilities are not discounted. Deferred tax is determined using the tax rates that have been enacted or substantively enacted by the balance sheet date, and are expected to apply when the deferred tax liability is settled or the deferred tax asset is realised. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Tax is recognised in the income statement, except where it relates to items recognised directly in equity, in which case it is recognised in equity. Dividends Final dividends are recognised as a liability in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid. Intangible Assets – Goodwill Goodwill represents the excess of the cost of an acquisition over the Group’s share of the fair value of the net identifiable assets, liabilities and contingent liabilities acquired. Goodwill arising on acquisitions made on or after 27 September 1998 is capitalised. Previously all goodwill was written off through equity in the period of acquisition. As permitted under IFRS 1, goodwill arising on acquisitions prior to 1 October 2004 is stated in accordance with UK GAAP and has not been remeasured on transition to IFRS. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Any impairment is recognised immediately in the income statement and cannot be subsequently reversed. Goodwill is allocated to groups of cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Gains or losses on the disposal of a Group company are determined by comparing the proceeds with the carrying value of the Group company’s assets and liabilities including the carrying amount of related goodwill. Goodwill previously written off directly to reserves under UK GAAP is not recycled to the income statement on the disposal of the subsidiary to which it relates. Intangible Assets – Other Other intangible assets are initially recognised in the balance sheet at historical cost unless they are acquired as part of a business combination, in which case they are initially recognised at fair value. They are shown in the balance sheet at historical cost or fair value (depending on how they are acquired) less accumulated amortisation and impairment.

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These assets consist mainly of acquired trademarks, concessions and rights, acquired customer relationships and computer software. The Davidoff cigarette trademark and some premium cigar trademarks are considered by the Directors to have indefinite lives based on the fact that they are established international brands with global potential. Trademarks with indefinite lives are not amortised but are reviewed annually for impairment. Other trademarks, supply agreements (including customer relationships) and computer software are amortised over their estimated useful lives as follows: Other trademarks up to 30 years straight line Supply agreements 3 – 15 years straight line Computer software up to 5 years straight line Property, Plant and Equipment Property, plant and equipment are initially recognised in the balance sheet at historical cost unless they are acquired as part of a business combination, in which case they are initially recognised at fair value. They are shown in the balance sheet at historical cost or fair value (depending on how they are acquired), less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets’ carrying amounts or recognised as a separate asset as appropriate only when it is probable that future economic benefits associated with them will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement as incurred. Land is not depreciated. Depreciation is provided on other property, plant and equipment so as to write off the initial cost of each asset to its residual value over its estimated useful life as follows: Buildings up to 50 years straight line Plant and equipment 2 – 20 years straight line/reducing balance Fixtures and motor vehicles 2 – 14 years straight line The assets’ residual values and useful lives are reviewed and, if appropriate, adjusted at each balance sheet date. Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the income statement. Leases Assets acquired under finance leases are included within property, plant and equipment. They are initially valued at the lower of fair value and the present value of the minimum lease payments. The assets are depreciated over the shorter of the lease term and the useful life of the asset. The associated lease liabilities are recognised in the balance sheet, and the interest element of the leasing payments is charged to the income statement. Rental payments under operating leases are charged to the income statement on a straight line basis over the lease term. Impairment of Assets Assets that are not subject to amortisation or depreciation are tested at least annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Financial Instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the relevant instrument. Financial assets are de-recognised when the rights to receive benefits have expired or been transferred, and the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are de-recognised when the obligation is extinguished. Non-derivative financial assets are classified as loans and receivables (including cash and cash equivalents). Receivables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method, subject to reduction for allowances for estimated irrecoverable amounts. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of those receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, and is recognised in the income statement. For interest-bearing assets, the carrying value includes accrued interest receivable. Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments. Non-derivative financial liabilities are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method. For borrowings, the carrying value includes accrued interest payable, as well as unamortised transaction costs. The Group transacts derivative financial instruments to manage the underlying exposure to foreign exchange and interest rate risks. The Group does not transact derivative financial instruments for trading purposes. Derivative financial assets and liabilities are included in the balance sheet at fair value, which includes accrued interest receivable and payable where relevant. However, as the Group has decided (as permitted under IAS 39) not to cash flow or fair value hedge account for its derivative financial instruments, changes in fair values are recognised in the income statement in the period in which they arise unless the derivative qualifies and has been designated as a net investment hedging instrument in which case the changes in fair values, attributable to foreign exchange, are recognised in equity. Collateral transferred under the terms and conditions of credit support annex documents under International Swaps and Derivatives Association (ISDA) agreements in respect of certain derivatives with negative fair values are net settled and are therefore netted off the carrying value of those derivatives on the balance sheet.

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FINANCIAL STATEMENTS Accounting Policies continued

Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Leaf tobacco inventory which has an operating cycle that exceeds twelve months is classified as a current asset, consistent with recognised industry practice. Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of resources will be required to settle that obligation, and a reliable estimate of the amount can be made. A provision for restructuring is recognised when the Group has approved a detailed formal restructuring plan, and the restructuring has either commenced or has been publicly announced, and it is more likely than not that the plan will be implemented, and the amount required to settle any obligations arising can be reliably estimated. Future operating losses are not provided for. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Retirement Benefit Schemes The Group operates a number of retirement benefit schemes for its employees, including both defined benefit and defined contribution schemes. Under a defined benefit scheme, the amount of retirement benefit that will be received by an employee is defined with respect to period of service and final salary. The amount recognised in the balance sheet is the difference between the present value of the defined benefit obligation at the balance sheet date and the fair value of the scheme assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows. The service cost of providing retirement benefits to employees during the year is charged to profit from operations. Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight line basis over the average vesting period. All actuarial gains and losses, including differences between actual and expected returns on assets and differences that arise as a result of changes in actuarial assumptions, are recognised immediately in full in the statement of recognised income and expense for the period in which they arise. A credit representing the expected return on plan assets of the retirement benefit schemes during the year is included within net finance costs. This is based on the market value of the assets of the schemes at the start of the financial year. A charge is also made within net finance costs for the expected increase in the liabilities of the retirement benefit schemes during the year. This arises from the schemes being one year closer to payment. For defined contribution schemes, the Group pays a defined contribution to the scheme; there are no further payment obligations once these contributions have been paid. Such contributions are recognised as an employee benefit expense when they are due. Any prepaid contributions are recognised as an asset to the extent that a cash refund or reduction in future payments is available. Share-Based Payments The Group applies the requirements of IFRS 2 Share-Based Payment to share-based employee compensation schemes in respect of awards granted after 7 November 2002. The Group operates equity-settled and cash-settled share-based compensation schemes. The cost of employees’ services received in exchange for the grant of rights under both types of scheme is expensed over the vesting period, and is determined by reference to the fair value of the instruments granted, excluding the impact of any non-market vesting conditions (e.g. earnings per share). Non-market vesting conditions are included in assumptions about the number of instruments that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of instruments that are expected to become exercisable under all schemes, and re-measures the fair value of the cash-settled schemes. The Group recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity for equity-settled schemes and current liabilities for cash-settled schemes. The fair value is measured based on an appropriate valuation model, taking into account the terms and conditions of the award. The Group funds the purchase of shares to satisfy rights to shares arising under share-based employee compensation schemes. Shares acquired to satisfy those rights are held in Employee Share Ownership Trusts. On consolidation, these shares are accounted for as a deduction from equity attributable to equity holders of the Company. When the rights are exercised, equity is increased by the amount of any proceeds received by the Employees Share Ownership Trusts. Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Company purchases its own equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted on consolidation from equity attributable to equity holders of the Company until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to equity holders of the Company.

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Segmental Reporting A business segment is a distinguishable component of the Group that is engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. The two distinct businesses of Tobacco and Logistics have been used as the primary reporting segments. Transactions between segments are undertaken on an arm’s length basis reflecting market prices for comparable products and services. Use of Non-GAAP or Adjusted Measures Management believes that reporting non-GAAP or adjusted measures provides a useful comparison of business performance and reflects the way in which the business is controlled. Accordingly, adjusted measures of profit from operations, net finance costs, profit before tax, taxation, attributable earnings and earnings per share exclude, where applicable, amortisation of acquired intangibles, restructuring costs, post-employment benefits net financing cost, fair value gains and losses on derivative financial instruments in respect of commercially effective hedges, one-off acquisition accounting adjustments, brand divestment gains and related taxation effects. Reconciliations between adjusted and reported profit from operations are included within note 1 to the financial statements, adjusted and reported net finance costs in note 5, adjusted and reported taxation in note 6, and adjusted and reported earnings per share in note 8. The adjusted measures in this report are not defined terms under IFRS and may not be comparable with similarly titled measures reported by other companies. The items excluded from adjusted results are those which are one-off in nature or which arose due to acquisitions and are not influenced by the day-to-day operations of the Group, and the movements in fair value of financial instruments which are marked-to-market and not naturally offset. Adjusted net finance costs also exclude all interest on items not included within adjusted net debt. This allows comparison of the Group’s cost of debt with adjusted net debt. The adjusted measures are used by management to assess the Group’s financial performance and aid comparability of results year-on-year. The principal adjustments made to reported profits are as follows: Acquisition Accounting Adjustments In 2008 there were a number of acquisition accounting adjustments required under IFRS which affected reported profit from operations. The most significant of these were one-off adjustments related to the adjustment to fair value stocks held in Altadis at the date of acquisition, and the elimination of sales between the Altadis and Imperial Tobacco Groups. Prior to the acquisition of Altadis, Imperial Tobacco sold products to Altadis, principally to the logistics business for distribution in France, Spain, Italy and Portugal, and recognised profit at the time of sale to Altadis. Following the acquisition the enlarged Group recognises these profits when the products are sold out of the enlarged Group, so there was an initial post acquisition period during which no profit was recognised. These one-off effects had no impact on the performance of the business or on cash flow. Consequently we excluded these adjustments and their related taxation effects from our adjusted earnings measures. Amortisation of Acquired Intangibles Acquired intangibles are amortised over their estimated useful economic lives where these are considered to be finite. Acquired intangibles considered to have an indefinite life are not amortised. We exclude from our adjusted measures the amortisation of acquired intangibles, other than software, and the deferred tax associated with amortisation of acquired intangibles and tax deductible goodwill. The deferred tax liability is excluded on the basis that it will only crystallise upon disposal of the intangibles and goodwill. The related current cash tax benefit is retained in the adjusted measure to reflect the ongoing tax benefit to the Group. Impairment of goodwill is also excluded from our adjusted measures. Brand Divestment The Group was required to divest a small number of fine cut and pipe tobacco brands as a condition of the European Commission’s approval of the acquisition of Altadis. This one-off gain and its related taxation effects have no impact on the operational performance of the business and have consequently been excluded from our adjusted earnings measures. Fair Value Gains and Losses on Derivative Financial Instruments IAS 39 requires that all derivative financial instruments are recognised in the balance sheet at fair value, with changes in the fair value being recognised in the income statement unless the instrument satisfies the hedge accounting rules under IFRS and the Group chooses to designate the derivative financial instrument as a hedge. The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of IAS 39 may lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, the Group has decided not to apply cash flow or fair value hedge accounting for its derivative financial instruments as permitted under IAS 39. However, the Group does apply net investment hedging, designating certain borrowings and derivatives as hedges of the net investment in the Group’s foreign operations, as permitted by IAS 39, in order to minimise income statement volatility. We exclude fair value gains and losses on derivative financial instruments providing commercial hedges from adjusted net financing costs. Fair value gains and losses on the interest element of derivative financial instruments are excluded as they will reverse over time or are matched in future periods by interest rate charges. Fair value gains and losses on the currency element of derivative financial instruments are excluded as the relevant foreign exchange gains and losses on the commercially hedged item are accumulated as a separate component of equity in accordance with the Group’s policy on foreign currency. Restructuring Costs Significant one-off costs incurred in integrating acquired businesses and in major rationalisation initiatives together with their related tax effects are excluded from our adjusted earnings measures. Post-Employment Benefits Net Financing Cost The expected return on plan assets and the interest on retirement benefit liabilities, together with the unwind of discount on redundancy and social plans costs included in restructuring provisions, are reported within net finance costs. These items together with their related tax effects are excluded from our adjusted earnings measures.

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FINANCIAL STATEMENTS Accounting Policies continued

Other Non-GAAP Measures Used by Management Net Revenue Net revenue comprises the Tobacco segment revenue less duty and similar items. Management considers this an important measure in assessing the profitability of Tobacco operations. Distribution Fees Distribution fees comprises the Logistics segment revenue excluding the cost of distributed products. Management considers this an important measure in assessing the profitability of Logistics operations. Adjusted Net Debt Management monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals, the fair value of derivative financial instruments providing commercial cash flow hedges and finance lease liabilities. New Accounting Standards The following interpretations became effective for the current reporting period: IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 18 Transfer of Assets from Customers Application of these interpretations has not had a material impact on the net assets or results of the Group. The following standards and interpretations were issued but application was not mandatory for the period: IAS 1 (Revised) Presentation of Financial Statements IAS 23 (Revised) Borrowing Costs IAS 27 (Revised) Consolidation and Separate Financial Statements IAS 32 and IAS 1 (amendment) Puttable Financial Instruments IAS 39 (amendments) Reclassification of Financial Assets and Eligible Hedged Items IAS 39/IFRIC 9 (amendment) Embedded Derivatives IFRS 2 (amendments) Amendments to IFRS 2 Share-Based Payment – Vesting Conditions and Cancellations, and Group Cash-settled Share-based Payments IFRS 3 (Revised) Business Combinations IFRS 1 and IAS 27 (amendment) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 7 (amendment) Financial Instruments: Disclosures IFRS 8 Operating Segments IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction IFRIC 15 Agreements for the Construction of Real Estate IFRIC 17 Distribution of Non-cash Assets to Owners The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the net assets or results of the Group other than IFRS 3 (Revised) which may have a material impact on the reporting of future acquisitions. IAS 1(Revised) will require some changes in the format of the financial statements and terminology.

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Critical Accounting Estimates and Judgements

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Legal Proceedings and Disputes In accordance with IFRS, the Group recognises liabilities where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be reliably estimated. In such instances a provision is calculated and recorded in the financial statements. In instances where these criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. A contingent liability is a possible obligation arising from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group; or a present obligation arising from past events that is not recognised in the financial statements because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or because the amount of the obligation cannot be measured with sufficient reliability. Realisation of any contingent liabilities not currently recognised or disclosed in the financial statements could have a material effect on the Group’s financial condition. As required under purchase accounting, claims and contingencies are recorded initially at fair value. Future changes to these estimates of fair value are required to be reflected in the income statement and could have a material effect on the Group’s results and financial condition. Application of these accounting principles to legal proceedings and disputes, including cases in which claimants are seeking damages for alleged smoking and health-related effects, is inherently difficult, given the complex nature of the facts and law involved. Deciding whether or not to provide for loss in connection with such claims requires the Group’s management to make determinations about various factual and legal matters beyond its control. The Group reviews outstanding legal cases following developments in the legal proceedings at each balance sheet date, in order to assess the need for provisions in its financial statements. Among the factors considered in making decisions on provisions are the nature of the litigation, claim or assessment, the legal processes and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including progress after the date of the financial statements but before those statements are issued), the opinions or views of legal counsel and other advisers, experience of similar cases and any decision of the Group’s management as to how it will respond to the litigation, claim or assessment. To the extent that the Group’s determinations at any time do not reflect subsequent developments or the eventual outcome of any claim, its future financial statements may be materially affected, with an adverse impact upon the Group’s profit from operations, financial position and liquidity. The Group is currently involved in a number of legal cases in which claimants are seeking damages for alleged smoking and health-related effects. In the opinion of the Group’s lawyers, the Group has meritorious defences to these actions, all of which are being vigorously contested. Although it is not possible to predict the outcome of the pending litigation, the Directors believe that the pending actions will not have a material adverse effect upon the revenue, profit or financial condition of the Group. Consequently, in respect of any such cases, the Group has not provided for any amounts in the consolidated financial statements. In October 2003 the UK Office of Fair Trading (OFT) commenced an investigation under the Competition Act 1998 into the operation of the UK tobacco supply chain. On 24 April 2008, the OFT issued a Statement of Objections (SO) which set out the OFT’s allegations against the tobacco manufacturers Imperial Tobacco Group and Gallaher, and 11 retailers. The OFT alleges that these tobacco manufacturers and retailers variously engaged in one or more unlawful practices in relation to retail prices for some or all of a number of tobacco products in breach of Chapter 1 of the Competition Act 1998. Following the issue of the SO, the OFT invited recipients of the SO to enter into settlement discussions on a ‘without prejudice’ basis to reach ‘early resolution agreements’ with the OFT. On 11 July 2008, the OFT announced that six of the parties subject to the SO had reached early resolution agreements with the OFT, agreeing to pay a combined figure of some £132.3 million if all leniency and early resolution discounts are taken into account. Other than Imperial Tobacco Group, the parties which have also not settled with the OFT and are therefore contesting the OFT’s allegations, are the Co-operative Group, Morrisons (including Safeway), Shell and Tesco. Imperial Tobacco Group’s detailed written response to the SO was submitted to the OFT on 15 August 2008 and Imperial Tobacco’s representatives made submissions to the OFT in defence of the allegations at an oral hearing on 3 December 2008. The OFT indicated in a letter dated 12 October 2009, that it currently intends to notify the parties of its ‘final’ decision in the investigation in the first quarter of 2010. We have no indication of whether that will be an infringement decision, a file closure decision or some other form of decision. If the OFT proceeds to an infringement decision, it may impose a fine. The maximum amount of any fine, under the statutory regime we believe that the OFT may apply, is 10 per cent of a company’s UK turnover for up to three years (although the actual amount may be less). By way of example, in the three years to 30 September 2003, Imperial Tobacco Group’s aggregate net UK turnover was £2,215 million. The applicable turnover on which the amount of a fine is based expressly excludes VAT and other taxes directly related to turnover, which Imperial Tobacco Group has been advised would also exclude duty. In addition, if the OFT were to make an infringement finding, it could issue orders prohibiting that activity in the future, whilst the infringing company might face the prospect of damages actions from third parties. If the OFT were to make an infringement decision, Imperial Tobacco Group would be able to appeal the OFT’s decision to the Competition Appeal Tribunal, and ultimately, on a point of law to the Court of Appeal. We take compliance with competition law very seriously and reject any suggestion that we have acted in any way contrary to the interests of consumers. Consequently, the Group has not provided any amount in the consolidated financial statements.

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FINANCIAL STATEMENTS Critical Accounting Estimates and Judgements continued

Property, Plant and Equipment and Intangible Assets Intangible assets (other than goodwill, the Davidoff cigarette trademark and certain premium cigar trademarks) and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on management’s estimates of the period over which the assets will generate revenue, and are periodically reviewed for continued appropriateness. Due to the long lives of certain assets, changes to the estimates used can result in significant variations in the carrying value. The Group assesses the impairment of property, plant and equipment and intangible assets subject to amortisation or depreciation whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include the following: – significant underperformance relative to historical or projected future operating results; – significant changes in the manner of the use of the acquired assets or the strategy for the overall business; and – significant negative industry or economic trends. Additionally, goodwill arising on acquisitions and indefinite lived assets are subject to impairment review. The Group’s management undertakes an impairment review annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. When it is determined that there is an indicator that the carrying value may not be recoverable, impairment is measured based on estimates of the recoverable amount of the underlying assets of the cash-generating unit. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the Group’s accounting estimates in relation to property, plant and equipment and intangible assets affect the amounts reported in the financial statements, especially the estimates of the expected useful economic lives and the carrying values of those assets. If business conditions were different, or if different assumptions were used in the application of this and other accounting estimates, it is likely that materially different amounts could be reported in the Group’s financial statements. See notes 9 and 10 to these financial statements. Retirement Benefits The costs, assets and liabilities of the defined benefit retirement schemes operating within the Group are determined using methods relying on actuarial estimates and assumptions. Details of the key assumptions are set out in note 18. The Group takes advice from independent actuaries relating to the appropriateness of the assumptions. It is important to note, however, that comparatively small changes in the assumptions used may have a significant effect on the Group’s financial statements. We estimate that a 0.5 per cent increase/(decrease) in the discount rate would increase/(decrease) the IAS 19 pension expense by approximately £3 million. We estimate that a 0.5 per cent decrease/(increase) in the expected return on plan assets would increase/(reduce) the IAS 19 pension expense by approximately £14 million. Income Taxes The Group is subject to income tax in numerous jurisdictions and significant judgement is required in determining the provision for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax issues based on estimates of the additional taxes that are likely to become due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made.

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Notes to the Financial Statements

1 Segmental Information Imperial Tobacco comprises two distinct businesses – Tobacco and Logistics – which have been used as the basis for the primary segment reporting below. The Tobacco segment comprises the manufacture, marketing and sale of tobacco and tobacco-related products, including sales to (but not by) the Logistics segment. The Logistics segment comprises the distribution of tobacco products for tobacco product manufacturers, including Imperial Tobacco, as well as a wide range of non-tobacco products and services. Central costs of the Group are allocated to the Tobacco and Logistics segments based on management’s assessment of the level of support provided to each business segment. The business segments presented reflect the management structure of the Group and the way in which the Group’s management reviews business performance. Transactions between segments are undertaken on an arm’s length basis reflecting market prices for comparable products and services. Segmental revenue 2009 In £s million Tobacco Logistics Eliminations Total External revenue 17,556 8,961 – 26,517 Inter-segment revenue 1,031 – (1,031) – Total segment revenue 18,587 8,961 (1,031) 26,517

2008 In £s million Tobacco Logistics Eliminations Total External revenue 14,967 5,561 – 20,528 Inter-segment revenue 683 – (683) – Total segment revenue 15,650 5,561 (683) 20,528 Segmental profit from operations and reconciliation to adjusted profit from operations 2009 In £s million Tobacco Logistics Eliminations Total Profit from operations 2,291 40 6 2,337 Amortisation of acquired intangibles 315 136 – 451 Restructuring costs 144 1 – 145 Adjusted profit from operations 2,750 177 6 2,933

2008 In £s million Tobacco Logistics Eliminations Total Profit from operations 1,531 23 (83) 1,471 Acquisition accounting adjustments 76 – 85 161 Amortisation of acquired intangibles 225 84 – 309 Brand divestment gain (174) – – (174) Restructuring costs 449 14 – 463 Adjusted profit from operations 2,107 121 2 2,230

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

1 Segmental Information continued

Other segmental information 2009 In £s million Tobacco Logistics Eliminations Total Operating assets 27,330 3,298 (187) 30,441 Unallocated assets: Cash and cash equivalents n/a n/a n/a 1,036 Taxation n/a n/a n/a 200 Derivative financial instruments n/a n/a n/a 248 Total assets n/a n/a n/a 31,925 Operating liabilities (4,461) (5,113) 193 (9,381) Unallocated liabilities: Borrowings n/a n/a n/a (12,067) Taxation n/a n/a n/a (2,649) Derivative financial instruments n/a n/a n/a (1,233) Total liabilities n/a n/a n/a (25,330) Additions to property, plant and equipment 223 22 – 245 Additions to intangible assets 7 5 – 12 Depreciation 126 26 – 152 Amortisation 323 145 – 468 Impairments 15 – – 15

2008 In £s million Tobacco Logistics Eliminations Total Operating assets 22,764 6,082 (845) 28,001 Unallocated assets: Cash and cash equivalents n/a n/a n/a 642 Taxation n/a n/a n/a 423 Derivative financial instruments n/a n/a n/a 173 Total assets n/a n/a n/a 29,239 Operating liabilities (3,692) (4,099) 64 (7,727) Unallocated liabilities: Borrowings n/a n/a n/a (12,236) Taxation n/a n/a n/a (2,680) Derivative financial instruments n/a n/a n/a (240) Total liabilities n/a n/a n/a (22,883) Additions to property, plant and equipment 184 30 – 214 Additions to intangible assets 12 5 – 17 Depreciation 108 15 – 123 Amortisation 207 89 – 296 Impairments 38 – – 38

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Geographic information 2009 European Rest of the In £s million Union Americas World Total External revenue 21,614 1,414 3,489 26,517 Operating assets by location 20,533 3,451 6,457 30,441 Additions to property, plant and equipment 205 12 28 245 Additions to intangible assets 9 1 2 12

2008 European Rest of the In £s million Union Americas World Total External revenue 17,012 874 2,642 20,528 Operating assets by location 20,430 3,317 4,254 28,001 Additions to property, plant and equipment 151 2 61 214 Additions to intangible assets 17 – – 17 European Union comprises the EU member states plus Norway, Iceland, Liechtenstein and Switzerland. Americas comprises North, Central and South America. The Cuban joint ventures are included in the Rest of the World. Tobacco segment In £s million unless otherwise indicated 2009 2008 Revenue 18,587 15,650 Net revenue 6,818 5,238 Profit from operations 2,291 1,531 Adjusted profit from operations 2,750 2,107 Adjusted operating margin 40.3% 40.2% Logistics segment In £s million unless otherwise indicated 2009 2008 Revenue 8,961 5,561 Distribution fees 964 607 Profit from operations 40 23 Adjusted profit from operations 177 121 Adjusted distribution margin 18.4% 19.9% Geographic analysis of Tobacco segment Adjusted 2009 Net profit from In £s million Revenue revenue operations UK 4,862 893 601 Germany 3,432 826 403 Spain 620 610 275 Rest of European Union 4,770 1,490 566 Americas 1,414 861 288 Rest of the World 3,489 2,138 617 18,587 6,818 2,750

Adjusted 2008 Net profit from In £s million Revenue revenue operations UK 4,711 869 584 Germany 2,945 664 309 Spain 411 411 150 Rest of European Union 4,067 1,250 494 Americas 874 542 166 Rest of the World 2,642 1,502 404 15,650 5,238 2,107

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

2 Profit Before Taxation Profit before taxation is stated after charging/(crediting): In £s million 2009 2008 Raw materials and consumables used 1,297 1,046 Employment costs (note 4) 1,266 971 Depreciation of property, plant and equipment 152 123 Amortisation of intangible assets 468 296 Impairment of intangible assets – 21 Impairment of property, plant and equipment 15 17 Operating lease charges: – plant and equipment 31 10 – other assets 25 12 Net foreign exchange losses 4 12 Write-down of inventories 38 19 Profit on disposal of property, plant and equipment (1) (1) Repairs and maintenance costs 45 25 Impairment of trade receivables 32 12 Brand divestment gain – (174) Analysis of fees payable to PricewaterhouseCoopers LLP and its associates In £s million 2009 2008 Audit fees in respect of the audit of the accounts of the Company 0.9 0.9 Audit fees in respect of the audit of the accounts of associates of the Company 4.1 4.0 Fees for other services supplied pursuant to legislation 0.1 1.1 5.1 6.0 Other services relating to taxation 1.7 3.1 Services relating to corporate finance transactions – 0.2 Other services 0.1 0.1 6.9 9.4 Of the above fees nil million (2008: £1.8 million) has been capitalised in the balance sheet. It is the responsibility of the Board of Trustees of the Imperial Tobacco Pension Fund to appoint the auditors to the scheme. The Board of Trustees acts independently of Group management. The fees paid to PricewaterhouseCoopers in respect of the audit of the Imperial Tobacco Pension Fund were £26,772 (2008: £25,170).

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3 Restructuring Costs In £s million 2009 2008 Employment related (mainly termination) 116 420 Impairment of property, plant and equipment 15 17 Other operating charges 14 26 145 463 Restructuring costs in 2009 relate primarily to European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. These projects affect sales and marketing, manufacturing and central support functions in a number of markets and will be implemented progressively over a period of three years. Costs in 2009 also include expenses related to the closure of our Tampa, Florida, USA cigar factory announced in June 2009. In addition to the European Integration projects, restructuring costs in 2008 include expenses relating to the closure of our cigar factory in Selma, Alabama, USA, the integration with Commonwealth Brands of the Lignum 2 operation acquired in May 2008, and costs in relation to streamlining Logistics operations in France. The net charge of £145 million in 2009 includes £23 million of unused restructuring provisions reversed during the period, £95 million booked as additional restructuring provisions, £15 million booked as an impairment of property, plant and equipment and £19 million booked against net retirement benefits liabilities. The remaining charge of £39 million was booked directly to the income statement as these costs did not meet the provisioning requirements of IAS 37. Restructuring costs are included within administrative and other expenses in the consolidated income statement. 4 Directors and Employees Employment costs In £s million 2009 2008 Wages and salaries 971 721 Social security costs 201 176 Pension costs (note 18) 73 56 Share-based payments (note 21) 21 18 1,266 971 Details of Directors’ emoluments and interests, and of key management compensation which represent related party transactions requiring disclosure under IAS 24, are provided within the Directors’ Remuneration Report on pages 55 to 70. These disclosures form part of the financial statements. Number of persons employed by the Group by segment during the year At 30 At 30 September Average September Average 2009 2009 2008 2008 Tobacco 31,462 32,839 33,431 27,317 Logistics 6,919 6,808 6,854 4,999 38,381 39,647 40,285 32,316 Number of persons employed by the Group by location during the year At 30 At 30 September Average September Average 2009 2009 2008 2008 European Union 18,367 18,814 19,358 15,719 Americas 8,365 8,931 10,880 7,650 Rest of the World 11,649 11,902 10,047 8,947 38,381 39,647 40,285 32,316

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

5 Net Finance Costs In £s million 2009 2008 Interest on bank deposits (39) (74) Expected return on retirement benefit assets (182) (224) Fair value gains on derivative financial instruments providing commercial hedges (590) (104) Fair value gains on derivative financial instruments hedging underlying borrowings (369) (141) Investment income (1,180) (543) Interest on bank and other loans 739 697 Interest on retirement benefit liabilities 200 179 Unwind of discount on redundancy and social plans 14 – Fair value losses on derivative financial instruments providing commercial hedges 1,250 376 Exchange losses on underlying borrowings 369 141 Finance costs 2,572 1,393 Net finance costs 1,392 850 Reconciliation from net finance costs to adjusted net finance costs In £s million 2009 2008 Reported net finance costs 1,392 850 Expected return on retirement benefit assets 182 224 Interest on retirement benefit liabilities (200) (179) Unwind of discount on redundancy and social plans (14) – Fair value gains on derivative financial instruments providing commercial hedges 590 104 Fair value losses on derivative financial instruments providing commercial hedges (1,250) (376) Adjusted net finance costs 700 623

6 Taxation Analysis of charge in the year In £s million 2009 2008 Current tax UK corporation tax at 28% (2008: average enacted 29%) being the rate for the year 61 2 Overseas taxation 346 359 Total current tax 407 361 Deferred tax Origination and reversal of temporary differences (139) (181) Total tax charge to income statement 268 180 Reconciliation from reported taxation to adjusted taxation The table below shows the tax impact of the adjustments made to reported profit before tax in order to arrive at the adjusted measure of earnings disclosed in note 8. In £s million 2009 2008 Reported taxation 268 180 Tax on acquisition accounting adjustments – 51 Deferred tax on amortisation of acquired intangibles 72 40 Tax on brand divestment gain – (59) Tax on fair value gains and losses on derivative financial instruments providing commercial hedges 185 79 Tax on post-employment benefits net financing cost/(income) 11 (13) Tax on restructuring costs 45 148 Adjusted tax charge 581 426

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Factors affecting the tax charge for the year The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the UK corporation tax rate for the year of 28 per cent (2008: average enacted 29 per cent) as follows: In £s million 2009 2008 Profit before tax 945 621 Tax at the UK corporation tax rate of 28% (2008: average enacted 29%) 265 180 Tax effects of: Differences in effective tax rates on overseas earnings (16) (9) Unrecognised deferred tax assets 6 – Items not deductible for tax purposes 14 15 Adjustments in respect of prior periods (1) (6) Total tax charge 268 180 Movement on current tax account In £s million 2009 2008 At 1 October (339) (217) Exchange movements (14) (11) Acquisitions – (75) Charged to income statement (407) (361) Charged to equity (110) (87) Cash paid 363 401 Other movements 8 11 At 30 September (499) (339) Analysis of current tax account In £s million 2009 2008 Current tax assets 52 31 Current tax liabilities (551) (370) (499) (339)

7 Dividends Amounts recognised as distributions to ordinary equity holders in the year In £s million 2009 2008 Final dividend for the year ended 30 September 2008 of 42.2p per share (2007: 42.2p) 427 326 Interim dividend for the year ended 30 September 2009 of 21.0p per share (2008: 20.9p) 213 161 640 487 A final dividend for the year ended 30 September 2009 of 52.0 pence per share has been proposed. This amounts to £527 million based on the number of shares ranking for dividend at 30 September 2009. At the year end, the shareholders had not yet approved the final dividend and therefore it is not included in the balance sheet as a liability. The dividend per share figures included in the table above reflect the bonus element of the rights issue as described in note 20.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

8 Earnings Per Share Basic earnings per share is based on the profit for the period attributable to the equity holders of the Company and the weighted average number of ordinary shares in issue during the period excluding shares held to satisfy the Group’s employee share schemes and shares purchased by the Company and held as treasury shares. Diluted earnings per share have been calculated by taking into account the weighted average number of shares that would be issued if rights held under the employee share schemes were exercised. No instruments have been excluded from the calculation on the grounds that they are anti-dilutive. In £s million 2009 2008 Earnings: basic and diluted 663 428

In millions of shares Weighted average number of shares: Shares for basic earnings per share 1,012.3 846.5 Potentially dilutive share options 2.7 3.0 Shares for diluted earnings per share 1,015.0 849.5

In pence Basic earnings per share 65.5 50.6 Diluted earnings per share 65.3 50.4 Basic and diluted earnings per share have been calculated on a post rights issue basis where the weighted average number of shares has been calculated to reflect the increased number of shares in issue after the rights issue and the bonus element for periods prior to the closing date of the rights issue, which is described in note 20. The bonus factor used was 1.1509. Reconciliation from reported to adjusted earnings and earnings per share 2009 2008 In £s million unless otherwise indicated EPS (pence) Earnings EPS (pence) Earnings Reported basic 65.5 663 50.6 428 Acquisition accounting adjustments – – 13.0 110 Amortisation of acquired intangibles 37.4 379 31.8 269 Brand divestment gain – – (13.6) (115) Fair value gains and losses on derivative financial instruments providing commercial hedges 46.9 475 22.8 193 Post-employment benefits net financing cost/(income) 2.1 21 (3.8) (32) Restructuring costs 9.9 100 37.2 315 Adjustments above attributable to minority interests – – (1.1) (9) Adjusted 161.8 1,638 136.9 1,159 Adjusted diluted 161.4 1,638 136.4 1,159

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9 Intangible Assets 2009 Supply In £s million Goodwill Trademarks agreements Software Total Cost At 1 October 2008 11,896 6,744 1,519 95 20,254 Additions – 1 3 8 12 Disposals – – – (1) (1) Exchange movements 1,800 1,037 237 – 3,074 At 30 September 2009 13,696 7,782 1,759 102 23,339

Amortisation and impairment At 1 October 2008 21 277 105 34 437 Amortisation charge for the year – 281 170 17 468 Disposals – – – (1) (1) Exchange movements – 54 24 – 78 At 30 September 2009 21 612 299 50 982

Net book value At 30 September 2009 13,675 7,170 1,460 52 22,357

2008 Supply In £s million Goodwill Trademarks agreements Software Total Cost At 1 October 2007 3,837 1,183 – 38 5,058 Acquisitions (note 24) 7,064 5,061 1,422 39 13,586 Additions – 5 – 12 17 Disposals – (19) – (2) (21) Exchange movements 995 514 97 8 1,614 At 30 September 2008 11,896 6,744 1,519 95 20,254

2008 Supply In £s million Goodwill Trademarks agreements Software Total Amortisation and impairment At 1 October 2007 – 85 – 23 108 Amortisation charge for the year – 183 105 8 296 Impairment 21 – – – 21 Disposals – – – (1) (1) Exchange movements – 9 – 4 13 At 30 September 2008 21 277 105 34 437

Net book value At 30 September 2008 11,875 6,467 1,414 61 19,817 Intangible amortisation and impairment are included within administrative and other expenses in the consolidated income statement. Supply agreements includes Logistics customer relationships and exclusive supply arrangements in Cuba and Morocco, all acquired under the purchase of Altadis. Amortisation and impairment in respect of acquired intangible assets are treated as a reconciling item between reported profit from operations and adjusted profit from operations. The adjustment comprises the amortisation and impairment charges in respect of goodwill, trademarks and supply agreements.

IMPERIAL TOBACCO GROUP PLC 2009 93 FINANCIAL STATEMENTS Notes to the Financial Statements continued

Goodwill and intangible asset impairment review Goodwill and intangible assets with indefinite lives are allocated to the Group’s cash-generating units (CGUs). For the Tobacco segment these are based on the geographic areas in which the Group operates. A summary of the carrying value of goodwill and intangible assets with indefinite lives is set out below. The joint ventures that distribute Cuban cigars worldwide were previously presented within the Rest of the World, but have been reported separately in the current year as sensitivity disclosures are being provided for this CGU. 2009 2008 Intangible Intangible assets with assets with In £s million Goodwill indefinite lives Goodwill indefinite lives European Union 6,742 135 5,818 115 Americas 1,783 103 1,598 88 Rest of the World 3,071 360 2,655 312 Cuban cigar joint ventures 284 246 255 211 Tobacco 11,880 844 10,326 726 Logistics 1,795 – 1,549 – 13,675 844 11,875 726 Goodwill has arisen principally on the acquisitions of Reemtsma in 2002 (mainly EU and Rest of the World), Commonwealth Brands in 2007 (Americas) and Altadis in 2008 (all CGUs). The Group tests goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if there are any indications that impairment may have arisen. The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections derived from three year financial budgets which are based on management’s experience and expectations and are approved by the Board annually. The compound annual growth rates implicit in these value-in-use calculations are shown below. Cash flows beyond the budget period are extrapolated using the estimated long-term growth rate of three per cent per annum. Discount rates used are based on the Group’s weighted average cost of capital adjusted for the different risk profiles of the CGUs. Pre-tax discount rates ranged from 8.6 per cent to 11.4 per cent. Initial growth Long term rate 1 growth rate 2 European Union 4.3% 3.0% Americas 9.1% 3.0% Rest of the World 9.0% 3.0% Cuban cigar joint ventures 5.0% 3.0% Logistics 0.8% 3.0%

1 Weighted average compound annual growth rate used for first three years in value-in-use calculations. 2 Weighted average compound annual growth rate used to extrapolate cash flows beyond the initial three years. For the Tobacco business in the European Union, Americas and the Rest of the World, and for Logistics, any reasonable movement in the assumptions of the impairment test would not result in an impairment. In addition to the initial growth rates shown above applied to cash flows arising in existing markets, the valuation of the Cuban cigar joint ventures includes assumptions about the timing and extent of cash flows from entry to new markets. The impairment test for the Cuban cigar joint ventures indicated headroom of £100 million and that a reduction of 15 per cent or more in the value of overall cash flows would result in an impairment. We do not consider that any reasonable movement in other assumptions relating to the Cuban cigar joint ventures would result in an impairment. No impairment charges have been recognised in the year in respect of goodwill and intangible assets. In 2008 goodwill impairment of £21 million was recognised in respect of the Sinclair Collis business included in European Union CGU, reducing the carrying value to nil. This impairment reflected the decline in UK vending sales as a result of the introduction of restrictions on smoking in licensed premises and anticipated access restrictions.

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10 Property, Plant and Equipment Fixtures 2009 Plant and and motor In £s million Property equipment vehicles Total Cost At 1 October 2008 1,042 1,198 305 2,545 Additions 13 173 59 245 Disposals (29) (49) (20) (98) Reclassifications (10) – 10 – Exchange movements 131 53 25 209 At 30 September 2009 1,147 1,375 379 2,901

Depreciation and impairment At 1 October 2008 24 558 143 725 Depreciation charge for the year 14 98 40 152 Impairment 23 (8) – 15 Disposals (3) (14) (13) (30) Exchange movements 7 13 9 29 At 30 September 2009 65 647 179 891

Net book value At 30 September 2009 1,082 728 200 2,010 Impairment includes reversal of impairments previously recognised as restructuring costs where new uses for the equipment have now been identified. The net book value above includes land and buildings of £59 million (2008: £51 million) held under a finance lease. Fixtures 2008 Plant and and motor In £s million Property equipment vehicles Total Cost At 1 October 2007 168 853 168 1,189 Acquisitions (note 24) 800 118 93 1,011 Additions 21 124 69 214 Disposals (30) (14) (6) (50) Reclassifications 12 27 (39) – Exchange movements 71 90 20 181 At 30 September 2008 1,042 1,198 305 2,545

Depreciation and impairment At 1 October 2007 17 438 94 549 Depreciation charge for the year 5 73 45 123 Impairment 2 15 – 17 Disposals (1) (10) (6) (17) Reclassifications (1) – 1 – Exchange movements 2 42 9 53 At 30 September 2008 24 558 143 725

Net book value At 30 September 2008 1,018 640 162 1,820 Land and buildings at net book value In £s million 2009 2008 Freehold 1,011 956 Leasehold 71 62 1,082 1,018 No assets (2008: net book value of £nil) are pledged as security for liabilities.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

11 Investments in Associates and Joint Ventures Investments in associates In £s million 2009 2008 At 1 October 16 4 Share of profit of associates 1 – Acquisitions – 13 Exchange movements 5 (1) At 30 September 22 16 Investments in joint ventures The principal joint ventures are Corporación Habanos, S.A., Cuba and Altabana S.L., Spain. Summarised financial information for the Group’s share of joint ventures, which are accounted for under the proportional consolidation method, is shown below: 2009 Corporación In £s million Habanos Altabana Others Total Revenue 34 72 9 115 Profit after taxation 7 6 – 13

Non-current assets 202 11 7 220 Current assets 49 52 10 111 Total assets 251 63 17 331 Current liabilities (21) (14) (2) (37) Non-current liabilities (30) (4) – (34) Total liabilities (51) (18) (2) (71) Net assets 200 45 15 260

2008 Corporación In £s million Habanos Altabana Others Total Revenue 11 45 3 59 Profit after taxation 8 6 1 15

Non-current assets 183 7 3 193 Current assets 31 46 5 82 Total assets 214 53 8 275 Current liabilities (31) (18) (1) (50) Non-current liabilities (25) (2) – (27) Total liabilities (56) (20) (1) (77) Net assets 158 33 7 198

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12 Inventories In £s million 2009 2008 Raw materials 912 749 Work in progress 72 64 Finished inventories 1,795 1,801 Other inventories 146 244 2,925 2,858 Other inventories comprise mainly duty-paid tax stamps. It is generally recognised industry practice to classify leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the processing cycle, ordinarily would not be consumed within one year. Leaf tobacco held within raw materials inventories at the balance sheet date will ordinarily be utilised within two years. 13 Trade and Other Receivables 2009 2008 In £s million Current Non-current Current Non-current Trade receivables 2,730 – 2,667 – Less: provision for impairment of receivables (49) – (17) – Net trade receivables 2,681 – 2,650 – Other receivables 226 84 234 95 Prepayments and accrued income 104 15 67 3 3,011 99 2,951 98 Trade receivables may be analysed as follows: 2009 2008 In £s million Current Non-current Current Non-current Within credit terms 2,559 – 2,309 – Past due by less than 3 months 79 – 291 – Past due by more than 3 months 43 – 50 – Amounts that are impaired 49 – 17 – 2,730 – 2,667 –

14 Cash and Cash Equivalents In £s million 2009 2008 Cash at bank and in hand 649 457 Short-term deposits and other liquid assets 387 185 1,036 642 £236 million (2008: £157 million) of total cash and cash equivalents is held in countries in which prior approval is required to transfer the funds abroad. Nevertheless, if the Group complies with these requirements, such liquid funds are at its disposition within a reasonable period of time. 15 Trade and Other Payables 2009 2008 In £s million Current Non-current Current Non-current Trade payables 1,247 – 1,096 – Other taxes, duties and social security contributions 5,779 – 4,775 – Deferred consideration – – 45 – Other payables 140 – 99 – Accruals and deferred income 285 23 168 14 7,451 23 6,183 14

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments (i) Management of financial risk The Group operates a centralised treasury function, Group Treasury, which is responsible for the management of the financial risks of the Group, together with its financing and liquidity requirements. It does not operate as a profit centre, nor does it enter into speculative transactions. The Group Treasury Committee (GTC) oversees the operation of Group Treasury in accordance with terms of reference set out by the Board. The Board reviews and approves all major treasury decisions. The GTC currently comprises the Finance Director, the Director of Accounting, Forecasting and Tax, Director of Investor Communications, Cigar Business Unit Finance Director, Senior Group Management Accountant Manufacturing, Group Treasurer and Deputy Group Treasurer. The GTC agrees a framework which sets out the current expectations and boundaries to assist in the effective oversight of Group Treasury activities, covering all key areas within Group Treasury. The Group Treasurer reports on a regular basis to the Board, including the provision of a monthly treasury report, which is also provided to the GTC. Foreign exchange risk The Group is exposed to movements in foreign exchange rates due to its commercial trading transactions denominated in foreign currencies, foreign currency cash deposits, borrowings and non-sterling derivatives. The Group’s policy is to manage its balance sheet translation risk by funding acquisitions and the underlying business assets with borrowings (post cross currency swaps) in the currency of the underlying net assets. This results in foreign currency profits from operations being reduced by foreign currency interest costs thereby minimising the translation exposure on foreign currency profits after tax. The Group issues debt in the market or markets that are most appropriate at the time of raising new finance and uses derivative financial instruments, such as cross currency swaps and interest rate swaps where necessary, to change the debt into the desired currency and into floating interest rates shortly after issue. At 30 September 2009, approximately 13 per cent (2008: 13 per cent) of adjusted net debt was denominated in sterling, 56 per cent in euro (2008: 62 per cent) and 31 per cent in US dollars (2008: 25 per cent). In 2009, 82 per cent of revenue (2008: 77 per cent) and 80 per cent of adjusted profit from operations (2008: 74 per cent) was in markets outside the UK. Certain sales in these markets are invoiced in currencies other than the functional currency of the selling company. The material foreign currency denominated costs include the purchase of tobacco leaf, which is sourced from various countries but purchased principally in US dollars, and packaging materials which are sourced from various countries and purchased in a number of currencies. After taking into account other US dollar inflows the Group currently does not consider the foreign exchange risk here to be material enough to hedge. The Group’s sterling dividend to shareholders is partly sourced from foreign subsidiary earnings. In order to provide certainty as to the amount of sterling available to pay future dividends the Group has entered into transactional cross currency swaps maturing between 2011 and 2015 that will convert forecast euro dividends from subsidiaries into sterling. Cash flow and fair value interest rate risk The Group’s interest rate risk arises from borrowings net of cash and cash equivalents. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group Treasury monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals, the fair value of derivative financial instruments providing commercial cash flow hedges and finance lease liabilities. The Group’s financial results are currently principally exposed to gains or losses arising from fluctuations in sterling, euro and US dollar interest rates. In order to manage the interest rate risk on its borrowings, the Group separates its borrowing activities from its interest rate risk management decisions by issuing debt in the market or markets that are most appropriate at the time of raising new finance and uses derivative financial instruments, such as cross currency swaps and interest rate swaps where necessary, to change the debt into the desired currency and into floating interest rates shortly after issue. The Group then transacts interest rate swaps at other times for different notional amounts and for different maturities to manage the Group’s exposure to interest rate risk. At 30 September 2009, 32 per cent (2008: 38 per cent) of adjusted net debt was at a floating rate of interest, 67 per cent (2008: 60 per cent) at a fixed rate of interest and one per cent (2008: two per cent) floating within a set range. The Group manages its interest rate exposure on a regular basis and reports the position monthly to the Board and GTC. This report shows the profit or loss impact of a defined interest rate shift for each of the major currencies of borrowings and forecast percentage of debt fixed for at least the next 10 years, together with other relevant information. Accounting for derivative financial instruments and hedging activities IAS 39 requires that all derivative financial instruments are recognised in the balance sheet at fair value, with changes in the fair value being recognised in the income statement unless the instrument satisfies the hedge accounting rules under IFRS and the Group chooses to designate the derivative financial instrument as a hedge. The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of IAS 39 may lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, the Group has decided not to apply cash flow or fair value hedge accounting for its derivative financial instruments as permitted under IAS 39. However, the Group does apply net investment hedging, designating certain borrowings and derivatives as hedges of the net investment in the Group’s foreign operations, as permitted by IAS 39, in order to minimise income statement volatility. See section (vi) below for details. The information contained in sections (ii) and (iii) below shows the underlying borrowing position before the effect of interest rate swaps and cross currency swaps.

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Sensitivity analysis IFRS 7 requires a sensitivity analysis that illustrates the estimated impact on the income statement and items recognised directly in equity due to hypothetical changes in foreign exchange rates and interest rates in relation to all of the Group’s financial instruments. The Group considers that the movements in interest rates and sterling foreign exchange rates shown in the table below represent reasonably possible changes. The impact on income and equity of these changes are shown in the table below. The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of financial instruments in foreign currencies are all constant and on the basis of the net investment hedge designations in place at 30 September 2009. The sensitivity analysis does not reflect any change to sales or costs that may result from changing interest or exchange rates. All financial assets and liabilities held in the functional currency of subsidiary companies are not included in the analysis. The analysis excludes instruments that expose the Group to interest rate and foreign exchange risk where such risk is fully hedged with another financial instrument. 30 September 2009 30 September 2008 Income Equity Income Equity In £s million gain/(loss) gain/(loss) gain/(loss) gain/(loss) 100 basis point increase/50 basis point (2008: 100 basis point) decrease in GBP interest rates (9)/5 – (8)/8 – 100 basis point increase/decrease in euro interest rates (12)/12 – (24)/24 – 100 basis point increase/25 basis point (2008: 100 basis point) decrease in US dollar interest rates (16)/4 – (11)/11 –

10% appreciation/depreciation of the euro (156)/128 (1,097)/898 (155)/130 (1,047)/856 10% appreciation/depreciation of the US dollar (222)/181 (56)/46 (202)/165 (50)/41 The impact in the income statement due to changes in interest rates reflects the effect on the Group’s floating rate debt at 30 September 2009. The impact in the income statement from foreign exchange rate movements primarily relates to derivative financial instruments that commercially hedge net investments, but are not accounted for as hedges under IAS 39 (although they are commercially effective). This value is expected to be fully offset by the retranslation of the hedged foreign currency net assets leaving a net impact on shareholders’ funds of zero. This gain or loss is excluded from our adjusted performance measures. The equity impact shown for foreign exchange sensitivity relates to derivative and non-derivative financial instruments hedging net investments. This value will be more than fully offset by the retranslation of the hedged foreign currency net assets. Credit risk The Group is exposed to credit risk arising from its trade receivables due from customers, as well as from cash and cash deposits and the mark-to-market of derivative financial instruments transacted with financial institutions. The Group has some significant concentrations of customer credit risk. However, the Group has implemented policies to ensure that sales of products are made to customers with an appropriate credit history and obtains guarantees or other means of credit support to reduce the risk where this is considered to be necessary. Analysis of trade and other receivables is provided in note 13. The Group has no material concentrations of credit risk from financial institutions. The Group has cash and has placed cash deposits and entered into derivative financial instruments with a diversified group of financial institutions with suitable credit ratings in order to manage its credit risk to any one financial institution. The table below summarises the Group’s major financial institution counterparties by credit rating and balances at 30 September 2009: 30 September 2009 30 September 2008 Maximum Maximum S&P Credit exposure to S&P Credit exposure to Counterparty Rating credit risk £m Rating credit risk £m Financial institution A AA 143 AA- 89 Financial institution B A+ 106 AA- 95 Financial institution C A+ 103 AA- 25 Financial institution D AA 95 AA+ 60 Financial institution E AA 89 AA 8 Financial institution F A 81 A 50 Financial institution G A+ 81 AA- 70 Management do not expect these counterparties to default on their current obligations. On 15 September 2008 Lehman Brothers Holdings announced it was filing for Chapter 11 bankruptcy protection. The Group had various financial instruments in place with Lehman Brothers International (Europe) at that date. On 2 October 2008 the Group served a default notice to terminate these financial instruments and filed a claim for settlement of the outstanding mark-to-market plus interest for £11.1 million. The mark-to-market of these financial instruments was fully provided against at 30 September 2008. The claim was subsequently sold on to a third party for £2.1 million in September 2009.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments continued Liquidity risk The Group would be exposed to liquidity risk from having insufficient funds to meet the financing needs of the Group. However, the Group actively maintains a mixture of short, medium and long-term committed facilities that are designed to ensure that the Group has sufficient available funds for the forecast requirements of the Group over the short to medium-term. At 30 September 2009 the Group had £3,109 million (2008: £2,053 million) of undrawn committed facilities, maturing between July 2010 and July 2012. As well as forecasting and monitoring the Group’s core liquidity needs, the Group Treasury function is in regular dialogue with subsidiary companies to ensure their liquidity needs are met. Subsidiary companies are funded by a combination of share capital and retained earnings, loans from central finance companies on commercial terms, or through local borrowings by the subsidiaries in appropriate currencies. Funds over and above those required for short-term working capital purposes by subsidiary companies are remitted to Group Treasury where practical and possible and are used to pay down debt whenever possible. The table below summarises the Group’s financial liabilities and derivatives analysed by maturity date based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, which have been calculated using spot rates at the relevant balance sheet date, including interest to be paid. The carrying value of derivative financial liabilities excludes collateral transferred in respect of certain derivatives with negative fair values for which there is no reasonable basis upon which to allocate future cash flows to maturity groupings. At 30 September 2009 Carrying Contractual Less than Between 1 Between 2 More than In £s million amount cash flows 1 year and 2 years and 5 years 5 years Non-derivative financial liabilities Bank loans 3,517 3,580 3,001 39 540 – Capital market issuance 8,550 12,803 546 546 5,212 6,499 Trade payables 1,247 1,247 1,247 – – – Finance lease liabilities 28 33 3 3 27 – Derivative financial liabilities Net settled derivatives 552 836 202 191 382 61 Gross settled derivatives 1,005 – receipts (8,524) (2,308) (1,037) (3,391) (1,788) – payments 9,387 2,284 1,109 3,871 2,123

At 30 September 2008 Carrying Contractual Less than Between 1 Between 2 More than In £s million amount cash flows 1 year and 2 years and 5 years 5 years Non-derivative financial liabilities Bank loans 7,421 7,500 4,454 2,559 487 – Capital market issuance 4,815 6,742 1,070 227 1,007 4,438 Trade payables 1,096 1,096 1,096 – – – Finance lease liabilities 26 32 3 3 26 – Derivative financial liabilities Net settled derivatives 110 205 24 21 89 71 Gross settled derivatives 318 – receipts (3,667) (2,203) (60) (611) (793) – payments 3,946 2,319 75 614 938

Price risk The Group is not exposed to equity securities price risk or financial instrument price risk other than its pension assets disclosed in note 18. The Group is exposed to commodity price risk in that there may be fluctuations in the price of tobacco leaf. As with other agricultural commodities, the price of tobacco leaf tends to be cyclical as supply and demand considerations influence tobacco plantings in those countries where tobacco is grown. Also, different regions may experience variations in weather patterns that may affect crop quality or supply and so lead to changes in price. The Group seeks to reduce this price risk by sourcing tobacco leaf from a number of different countries, sourcing from various counterparties and by varying the levels of tobacco leaf held.

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Capital risk management The Group manages the capital structure in an efficient manner in order to minimise the cost of capital whilst ensuring that we have access to ongoing sources of finance such as the debt capital markets. The Group defines capital as adjusted net debt (see note 27) and equity attributable to equity holders of the Company (see note 22). The only externally imposed capital requirements for the Group are interest cover and gearing covenants under the terms of the Senior Bank Facility. The Group therefore manages the capital structure to maintain an investment grade credit rating and has and will continue to take the appropriate measures to maintain this. For example, where new equity is needed, the Group will issue the minimum required in order to maintain an investment grade credit rating. This is determined in connection with detailed discussions with credit rating agencies. Fair value estimation The fair values of derivatives are determined using valuation techniques based on market data (such as yield curves and foreign exchange rates) to calculate the present value of the estimated future cash flows at the balance sheet date. The fair values of financial assets and liabilities maturing within one year are approximate to their carrying value. For liabilities with a maturity of more than one year the fair value is based on quoted market prices at the balance sheet date. (ii) Borrowings The Group’s borrowings at amortised cost at the balance sheet date are as follows: In £s million 2009 2008 Current borrowings Bank loans and overdrafts 2,560 1,849 Capital market issuance: €600m 4.25% notes due 2008 – 491 US$600m 7.125% notes due 2009 – 338 Total current borrowings 2,560 2,678

Non-current borrowings Bank loans 957 5,572 Capital market issuance: £350m 6.875% notes due 2012 357 357 €1,250m 5.0% notes due 2012 1,157 – €500m 5.125% notes due 2013 474 410 €1,200m 4.375% notes due 2013 1,137 981 €750m 7.25% notes due 2014 687 592 €500m 4.0% notes due 2015 431 366 £450m 5.5% notes due 2016 470 470 €1,500m 8.375% notes due 2016 1,440 – £200m 6.25% notes due 2018 210 210 £500m 7.75% notes due 2019 509 – £1,000m 9.0% notes due 2022 1,053 – £600m 8.125% notes due 2024 625 600 Total non-current borrowings 9,507 9,558 Total borrowings 12,067 12,236 Current borrowings and non-current borrowings at 30 September 2009 include interest payable of £3 million (2008: £27 million) and £299 million (2008: £131 million) respectively. Certain borrowings drawn under revolving credit facilities have been classified as non-current borrowings, in accordance with the maturity date of those facilities. The Group has not defaulted on any loans during the year (2008: no defaults).

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments continued (iii) Currency analysis and effective interest rates of financial assets and financial liabilities The currency denomination, the maturities and the effective interest rates of the Group’s financial assets and liabilities (excluding derivatives) at 30 September 2009 are as follows: Maturity Less than Between 1 Between 2 More than Weighted 1 year and 2 years and 5 years 5 years Total average £m % £m % £m % £m % £m % Assets/(liabilities) (before the impact of cross currency swaps and interest rate swaps) Cash and cash equivalents Sterling 253 0.3 ––––––253 0.3 Euro 345 3.1 ––––––345 3.1 US dollars 15 0.2 ––––––15 0.2 Other 423 3.7 ––––––423 3.7 Total cash and cash equivalents 1,036 –––1,036 Weighted average receivable interest rate 2.6 –––2.6 Trade receivables Sterling 512 –––––––512 – Euro 1,920 –––––––1,920 – US dollars 126 –––––––126 – Other 172 –––––––172 – Total trade receivables 2,730 –––2,730 Trade payables Sterling (48) –––––––(48) – Euro (996) –––––––(996) – US dollars (110) –––––––(110) – Other (93) –––––––(93) – Total trade payables (1,247) –––(1,247) Borrowings – by currency Sterling ––––(357) 6.8 (2,867) 7.8 (3,224) 7.7 Euro (1,237) 1.3 ––(4,381) 4.4 (1,871) 7.0 (7,489) 4.5 US dollars (1,222) 1.1 (29) 2.9 ––––(1,251) 1.1 Other (101) 4.8 (2) 4.8 ––––(103) 4.8 Total borrowings (2,560) (31) (4,738) (4,738) (12,067) Borrowings – by class of instrument Bank borrowings (2,560) 1.3 (31) 3.0 (926) 1.3 ––(3,517) 1.4 Capital market issuance ––––(3,812) 5.4 (4,738) 7.5 (8,550) 6.5 Total borrowings (2,560) (31) (4,738) (4,738) (12,067) Weighted average payable interest rate 1.3 3.0 4.6 7.5 5.0 The effective interest rates shown in the table above have been calculated excluding the accrued interest balances. The bank borrowings are floating rate liabilities. The majority bear interest at rates set in advance by reference to LIBOR in the case of sterling and US dollars and to EURIBOR in the case of euro borrowings. The capital market issuances in place at 30 September 2009 bear interest (pre interest rate swaps) at a fixed rate throughout their life. The impact of interest rate swaps and cross currency swaps to manage the resultant interest rate risk arising is shown in section (v) below.

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The currency denomination, the maturities and the effective interest rates of the Group’s financial assets and liabilities (excluding derivatives) at 30 September 2008 were as follows: Maturity Less than Between 1 Between 2 More than Weighted 1 year and 2 years and 5 years 5 years Total average £m % £m % £m % £m % £m % Assets/(liabilities) (before the impact of cross currency swaps and interest rate swaps) Cash and cash equivalents Sterling 6 4.2 ––––––64.2 Euro 307 2.2 ––––––307 2.2 US dollars 69 2.2 ––––––69 2.2 Other 260 4.2 ––––––260 4.2 Total cash and cash equivalents 642 –––642 Weighted average receivable interest rate 3.0 –––3.0 Trade receivables Sterling 547 –––––––547 – Euro 1,715 –––––––1,715 – US dollars 109 –––––––109 – Other 296 –––––––296 – Total trade receivables 2,667 –––2,667 Trade payables Sterling (60) –––––––(60) – Euro (863) –––––––(863) – US dollars (53) –––––––(53) – Other (120) –––––––(120) – Total trade payables (1,096) –––(1,096) Borrowings – by currency Sterling (3) 5.5 (648) 6.1 (427) 6.8 (1,281) 6.9 (2,359) 6.7 Euro (2,246) 5.2 (2,291) 5.7 (1,373) 5.5 (2,348) 4.5 (8,258) 5.2 US dollars (338) 7.1 (1,074) 4.2 (28) 4.1 ––(1,440) 4.9 Other (91) 4.1 (44) 4.0 (44) 4.0 ––(179) 4.1 Total borrowings (2,678) (4,057) (1,872) (3,629) (12,236) Borrowings – by class of instrument Bank borrowings (1,849) 5.4 (4,057) 5.3 (1,515) 5.5 ––(7,421) 5.4 Capital market issuance (829) 5.4 ––(357) 6.8 (3,629) 5.5 (4,815) 5.6 Total borrowings (2,678) (4,057) (1,872) (3,629) (12,236) Weighted average payable interest rate 5.4 5.3 5.7 5.5 5.4 The effective interest rates shown in the table above have been calculated excluding the accrued interest balances. The bank borrowings are floating rate liabilities. The majority bear interest at rates set in advance by reference to LIBOR in the case of sterling and US dollars and to EURIBOR in the case of euro borrowings. The capital market issuances in place at 30 September 2008 bear interest (pre interest rate swaps) at a fixed rate throughout their life. The impact of interest rate swaps and cross currency swaps to manage the resultant interest rate risk arising is shown in section (v) below. (iv) Derivative financial instruments IAS 39 requires that all derivative financial instruments are recognised in the balance sheet at fair value, with changes in the fair value being recognised in the income statement unless the instrument satisfies the hedge accounting rules under IFRS and the Group chooses to designate the derivative financial instrument as a hedge. The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of IAS 39 may lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, the Group has decided not to apply cash flow or fair value hedge accounting for its derivative financial instruments as permitted under IAS 39. However, the Group does apply net investment hedging, designating certain borrowings and derivatives as hedges of the net investment in the Group’s foreign operations, as permitted by IAS 39, in order to minimise income statement volatility. See section (vi) below for details. The information contained in sections (ii) and (iii) above shows the underlying borrowing position before the effect of interest rate swaps and cross currency swaps.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments continued The Group separates its borrowing activities from its interest rate risk management decisions by issuing debt in the market or markets that are most appropriate at the time of raising new finance and using derivative financial instruments, such as cross currency swaps and interest rate swaps, to change the debt into the desired currency and into floating interest rates shortly after issue. The following table sets out the derivative financial instruments held by the Group at 30 September 2009, and demonstrates the Group’s use of those derivative financial instruments to manage the Group’s foreign currency exchange rate and interest rate exposures. The table presents the nominal value of such instruments used to calculate the contractual payments under such contracts, analysed by maturity date, together with the related weighted average interest rate where relevant. Seven of the interest rate swaps have embedded options and assumptions have been made based on market information and third party advice at 30 September 2009 to determine whether such options are likely to be exercised and when in order to determine the probable maturity date, however the actual maturity date could be earlier or later depending upon future market conditions. Debt is issued in the market or markets that are most appropriate at the time of raising new finance. Matures in financial year ending in 2010 2011 2012 2013 2014Thereafter Total GBP equivalent at 30 September 2009 £m Capital market issuance £350m 6.875% notes due 2012 – – 350 – – – 350 €1,250m 5.0% notes due 2012 – – 1,144 – – – 1,144 €500m 5.125% notes due 2013 – – – – 457 – 457 €1,200m 4.375% notes due 2013 – – – – 1,098 – 1,098 €750m 7.25% notes due 2014 – – – – 686 – 686 €500m 4.0% notes due 2015 – – – – – 457 457 £450m 5.5% notes due 2016 – – – – – 450 450 €1,500m 8.375% notes due 2016 – – – – – 1,372 1,372 £200m 6.25% notes due 2018 – – – – – 200 200 £500m 7.75% notes due 2019 – – – – – 500 500 £1,000m 9.0% notes due 2022 – – – – – 1,000 1,000 £600m 8.125% notes due 2024 – – – – – 600 600 Interest accruals, discounts and fair value adjustments – – 21 – 56 159 236 Total capital market issuance ––1,515 – 2,297 4,738 8,550 Bank loans and overdrafts, borrowed at LIBOR (or equivalent) plus a margin at the time of borrowing 2,559 31 948 –––3,538 Interest accruals 1–(22) –––(21) Total bank borrowings 2,560 31 926 –––3,517 Total borrowings 2,560 31 2,441 – 2,297 4,738 12,067 Derivative financial instruments are then transacted to change the debt issued into the desired currency and into floating interest rates, per the following table.

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Fair value at 30 September Financial year ending in 2009 2010 2011 2012 2013 2014 Thereafter Total Asset Liability GBP equivalent at 30 September 2009 £m Cross currency swaps Receive sterling, pay euro: Notional amount – – 3501 – – 6501 1,000 – 320 Sterling interest rate to receive (%) – – 6.7 – – 5.6 6.0 Interest margin over EURIBOR to pay (%) – – 1.3 – – 0.8 1.0

Foreign exchange swaps Receive euro, pay US dollar: Notional amount 2,003 – – – – – 2,003 – 22

Sterling interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount – – – – – 2,100 2,100 50 28 Weighted average interest rate to receive (%) – – – – – 8.2 8.2 Weighted average margin over LIBOR to pay (%) – – – – – 4.2 4.2

Euro interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount – – 1,144 – 2,241 1,830 5,215 187 3 Weighted average interest rate to receive (%) – – 4.8 – 5.3 7.0 5.8 Weighted average margin over EURIBOR to pay (%) – – 2.7 – 1.3 4.0 2.5 Derivative financial instruments are then transacted to create the desired interest rate risk. Sterling interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount – – 110 – 300 2192, 5 629 – 48 Weighted average interest rate to pay (%) – – 6.1 – 5.0 4.6 5.1

Euro interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 485 2203 2,501 9294 439 1,7846 6,358 – 317 Weighted average interest rate to pay (%) 3.7 3.9 4.0 3.9 3.8 4.2 3.9 Basis swaps – receive variable monthly, pay variable quarterly Notional amount 1,262 – – – – – 1,262 1 –

US dollar interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount – – 1,001 – 501 8057 2,307 – 148 Weighted average interest rate to pay (%) – – 3.9 – 4.0 4.7 4.2 Collars purchased: Notional amount – 1258 – – – – 125 – 5 Caps purchased: Notional amount 639 – – – – – 63 – – Basis swaps – receive variable monthly, pay variable quarterly Notional amount 626 – – – – – 626 1 –

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments continued Additional derivatives are then transacted to manage net investment hedging risk. Fair value at 30 September Financial year ending in 2009 2010 2011 2012 2013 2014 Thereafter Total Asset Liability GBP equivalent at 30 September 2009 £m Non-deliverable forward Receive euro, pay Moroccan dirham (MAD): Notional amount 134 – – – – – 134 9 – Additional derivatives are then transacted to manage the cash flow risk associated with converting euro dividends from subsidiaries into sterling. Cross currency swaps Receive sterling ﬁxed, pay euro ﬁxed: Notional amount – 753 983 1,012 584 1,026 4,358 – 663 Weighted average interest rate to pay (%) – 4.6 4.6 4.6 4.7 4.6 4.7 Weighted average interest rate to receive (%) – 5.7 5.7 5.6 5.6 5.5 5.6 Additional derivatives are then transacted to manage the short-term cash flow risk associated with converting anticipated cash flows from subsidiaries into sterling. FX forwards Receive US dollar, pay sterling: Notional amount 111 – – – – – 111 – 3

Total fair value of derivative financial instruments at 30 September 2009 248 1,557 Collateral transferred under the terms and conditions of credit support annex documents under ISDA agreements in respect of certain derivatives with negative fair values – (324) Total carrying value of derivative financial instruments at 30 September 2009 248 1,233 The above amounts are included in the balance sheet as follows: Current 239 564 Non-current 9 669 248 1,233 Net liability 985 The overall effect of the interest rate swaps live at 30 September 2009 is to convert £7,429 million of borrowings into a fixed rate with £125 million of borrowings floating within a set range. 1 Principal amounts under these cross currency swaps are exchanged at the start and maturity of these trades. 2 The following trades are included within this balance: £15 million interest rate swap maturing in 2031 where the counterparty has the option to cancel every three months throughout the life of the trade. This trade is expected to be cancelled in November 2018. £50 million interest rate swap maturing in 2041 where the counterparty has the option to cancel every five years throughout the life of the trade. This trade is expected to be cancelled in April 2016. 3 The following trade is included within this balance: €240 million interest rate swaps maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade. These trades are expected to be cancelled in February 2011. 4 The following trades are included within this balance: €960 million interest rate swaps maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade. These trades are expected to be cancelled in August 2013. 5 The following trades are included within this balance: £64 million forward start ten year interest rate swaps starting in May 2012. £90 million forward start ten year interest rate swaps starting in May 2014. 6 The following trades are included within this balance: €500 million forward start five year interest rate swaps starting in April 2012. €900 million forward start five year interest rate swaps starting in May 2012. 7 The following trades are included within this balance: US$500 million forward start five year interest rate swaps starting in April 2012. US$186 million forward start ten year interest rate swaps starting in April 2012. 8 US$200 million interest rate collar maturing in 2011 where the interest rate is fixed within the range 3.78% to 6.00%. 9 US$100 million interest rate cap maturing in 2010 where the interest rate is capped at 6.00%.

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The following table sets out the derivative financial instruments held by the Group at 30 September 2008. Debt is issued in the market or markets that are most appropriate at the time of execution. Matures in financial year ending in 2009 2010 2011 2012 2013 Thereafter Total GBP equivalent at 30 September 2008 £m Capital market issuance €600m 4.25% notes due 2008 474 – – – – – 474 US$600m 7.125% notes due 2009 336 – – – – – 336 £350m 6.875% notes due 2012 – – – 350 – – 350 €500m 5.125% notes due 2013 – – – – – 395 395 €1,200m 4.375% notes due 2013 – – – – – 947 947 €750m 7.25% notes due 2014 – – – – – 592 592 €500m 4.0% notes due 2015 – – – – – 395 395 £450m 5.5% notes due 2016 – – – – – 450 450 £200m 6.25% notes due 2018 – – – – – 200 200 £600m 8.125% notes due 2024 – – – – – 600 600 Interest accruals, discounts and fair value adjustments 19 – – 7 – 50 76 Total capital market issuance 829 – – 357 – 3,629 4,815 Bank loans and overdrafts, borrowed at LIBOR (or equivalent) plus a margin at the time of borrowing 1,838 4,040 – 1,514 – – 7,392 Interest accruals 11 17 – 1 – – 29 Total bank borrowings 1,849 4,057 – 1,515 – – 7,421

Total borrowings 2,678 4,057 – 1,872 – 3,629 12,236 Derivative financial instruments are then transacted to change the debt issued into the desired currency and into floating interest rates. Fair value at 30 September Financial year ending in 2008 2009 2010 2011 2012 2013 Thereafter Total Asset Liability GBP equivalent at 30 September 2008 £m Cross currency swaps Receive sterling, pay euro: Notional amount – – – 3501 – 6501 1,000 – 213 Sterling interest rate to receive (%) – – – 6.7 – 5.6 6.0 Interest margin over EURIBOR to pay (%) – – – 1.3 – 0.8 1.0

Receive US dollar, pay sterling: Notional amount 3361 – – – – – 336 – 32 US dollar interest rate to receive (%) 7.1 – – – – – 7.1 Sterling interest margin over LIBOR to pay (%) 1.3 – – – – – 1.3

Receive euro, pay US dollar: Notional amount 1,737 – – – – – 1,737 – 70 US dollar interest margin over LIBOR to pay (%) – – – – – – –

Euro interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount – – – – – 1,855 1,855 – 47 Weighted average interest rate to receive (%) – – – – – 6.8 6.8 Weighted average margin over EURIBOR to pay (%) – – – – – 1.3 1.3

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments continued Fair value at 30 September Financial year ending in 2008 2009 2010 2011 2012 2013 Thereafter Total Asset Liability GBP equivalent at 30 September 2008 £m Sterling interest rate derivatives Interest rate swaps – pay variable, receive ﬁxed: Notional amount – – – – – 600 600 – 4 Weighted average interest rate to receive (%) – – – – – 8.1 8.1 Weighted average margin over LIBOR to pay (%) – – – – – 3.1 3.1 Derivative financial instruments are then transacted to create the desired interest rate risk. Sterling interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount – – – 110 – 3652 475 2 5 Weighted average interest rate to pay (%) – – – 6.1 – 4.9 5.1

Euro interest rate derivatives Interest rate swaps – pay ﬁxed, receive variable: Notional amount 3473 1,1764 2,0565 43 1,9186 5,540 84 15 Weighted average interest rate to pay (%) 4.4 3.9 4.0 4.0 4.2 4.0 Basis swaps – receive variable monthly, pay variable quarterly Notional amount 1,697 – – – – – 1,697 – 10

US dollar interest rate derivatives Interest rate swaps – pay fixed, receive variable: Notional amount 336 – – 8977 – 7298 1,962 7 26 Weighted average interest rate to pay (%) 5.1 – – 3.9 – 4.6 4.3 Collars purchased: Notional amount 1359 – 11210 – – – 247 – 2 Caps purchased: Notional amount 2811 5612 – – – – 84 – – Basis swaps – receive variable monthly, pay variable quarterly Notional amount 561 – – – – – 561 – 2 Basis swaps – receive euro variable quarterly, pay US dollar variable quarterly Notional amount 22 – – – – – 22 4 – Additional derivatives are then transacted to manage net investment hedging risk. Non-deliverable forward Receive euro, pay Moroccan dirham: Notional amount – – – 116 – – 116 – 2 Additional derivatives are then transacted to manage the cash flow risk associated with converting euro dividends from subsidiaries into sterling. Cross currency swaps Receive sterling fixed, pay euro fixed: Notional amount – – 753 983 1,012 1,610 4,358 76 – Weighted average interest rate to pay (%) – – 4.6 4.6 4.7 4.7 4.7 Weighted average interest rate to receive (%) – – 5.7 5.7 5.6 5.6 5.6

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Fair value at 30 September 2008 Asset Liability Total fair value of derivative financial instruments at 30 September 2008 173 428 Collateral transferred under the terms and conditions of credit support annex documents under ISDA agreements in respect of certain derivatives with negative fair values – (188) Total carrying value of derivative financial instruments at 30 September 2008 173 240 The above amounts are included in the balance sheet as follows: Current 97 238 Non-current 76 2 173 240 Net liability 67 Therefore, the overall effect of the interest rate swaps live at 30 September 2008 is to convert £6,870 million of borrowings into a fixed rate with £331 million of borrowings floating within a set range, see below. 1 Principal amounts under these cross currency swaps are exchanged at the start and maturity of these trades. 2 The following trades are included within this balance: £15 million interest rate swap maturing in 2031 where the counterparty has the option to cancel every three months throughout the life of the trade. This trade is expected to be cancelled in April 2015. £50 million interest rate swap maturing in 2041 where the counterparty has the option to cancel every five years throughout the life of the trade. This trade is expected to be cancelled in April 2016. 3 The following trade is included within this balance: €240 million interest rate swap maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade. This trade is expected to be cancelled in November 2008. 4 The following trades are included within this balance: €480 million interest rate swaps maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade. These trades are expected to be cancelled in February 2010. €480 million interest rate swaps maturing in 2013 where the counterparty has the option to cancel every three months throughout the life of the trade. These trades are expected to be cancelled in August 2010. 5 The following trades are included within this balance: €75 million forward start three year interest rate swaps starting in April 2009. €375 million forward start three year interest rate swaps starting in May 2009. 6 The following trades are included within this balance: €500 million forward start five year interest rate swaps starting in April 2012. €900 million forward start five year interest rate swaps starting in May 2012. 7 The following trades are included within this balance: US$400 million forward start three year interest rate swaps starting in April 2009. 8 The following trades are included within this balance: US$500 million forward start five year interest rate swaps starting in April 2012. 9 US$240 million interest rate collar maturing in 2009 where the interest rate is fixed within the range 3.55% to 6.00%. 10 US$200 million interest rate collar maturing in 2011 where the interest rate is fixed within the range 3.78% to 6.00%. 11 US$50 million interest rate cap maturing in 2009 where the interest rate is capped at 6.00%. 12 US$100 million interest rate cap maturing in 2010 where the interest rate is capped at 6.00%.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

16 Borrowings and Derivative Financial Instruments continued (v) Reconciliation of movement in carrying value of derivative financial instruments The movements in the carrying value of derivative financial instruments in the year were as follows:

Fair value attributable Fair value to currency movements attributable to recognised in: interest rate Statement of differences recognised recognised income and Income in income In £s million expense statement statement Total Fair value gains on derivative financial instruments providing commercial hedges (note 5) – 226 364 590 Fair value losses on derivative financial instruments providing commercial hedges (note 5) – (626) (624) (1,250) Net fair value losses on derivative financial instruments providing commercial hedges – (400) (260) (660) Fair value gains on derivative financial instruments hedging underlying borrowings (note 5) – 369 – 369 Fair value losses on derivative financial instruments designated as net investment hedges (768) ––(768) Fair value movement during year (768) (31) (260) (1,059) Total carrying value of derivative financial instruments at 30 September 2008 (note 16 (iv)) (103) (4) 40 (67) Reclassification – (6) 6– Collateral transferred in respect of certain derivative financial instruments with negative values – 125 – 125 Interest on collateral transferred in respect of certain derivative financial instruments with negative values – 11 – 11 Cash payment on settlement of matured derivative financial instruments 61 (56) –5 Fair value at 30 September 2009 (810) 39 (214) (985) (vi) Hedge of net investments in foreign operations At 30 September 2009 external loans with a fair value of €5,294 million, US$800 million and MADnil (2008: €6,429 million, US$800 million and MAD2,500 million), cross currency swaps of €5,502 million (2008: €5,502 million) and non-deliverable forwards of MAD1,675 million (2008: MAD1,675 million) have been designated as hedges of the net investment in the Group’s foreign operations. Gains or losses on the retranslation of these borrowings and derivatives are transferred to equity to offset any gains or losses on translation of the net investments in the Group’s foreign operations. Permanent intragroup loans with a fair value of €4,284 million (2008: €4,284 million) have been treated as a reduction in investments in the Group’s foreign operations. In addition, cross currency swaps of €1,516 million (2008: €1,516 million) and US$nil (2008: US$3,235 million) and foreign exchange swaps of US$3,235 million (2008: US$nil) are considered to provide commercial hedges against investments in the Group’s foreign operations. The fair value gains and losses on these derivatives are recognised in the income statement, but are excluded from our adjusted performance measures.

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(vii) Fair values of financial assets and financial liabilities Set out below is a comparison by category of carrying amounts and fair values of all financial liabilities that are carried in the financial statements at amounts other than fair values. All financial assets and liabilities are carried at amortised cost, other than derivative financial instruments that are carried at fair value. The carrying amounts of cash and cash equivalents, trade receivables and trade payables are approximate to their fair value and so are excluded from the analysis below. Derivative financial instruments are excluded as they are carried at fair value. No assets are held as available for sale. 2009 2008 Carrying Carrying In £s million amount Fair value amount Fair value Current borrowings Sterling – – 3 3 Euro 1,237 1,237 2,246 2,247 US dollars 1,222 1,222 338 342 Other 101 101 91 91 Total current borrowings 2,560 2,560 2,678 2,683

Non-current borrowings Sterling 3,224 3,655 2,145 2,065 Euro 6,252 6,662 6,223 6,020 US dollars 29 29 1,102 1,102 Other 2 2 88 88 Total non-current borrowings 9,507 10,348 9,558 9,275 Within the table above it is only the capital market issues that have a fair value different to the carrying value and this has been calculated by comparing the current trading levels to par. 17 Deferred Tax Assets and Liabilities Deferred tax assets and liabilities are offset only when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet. In £s million 2009 2008 Deferred tax assets 148 392 Deferred tax liabilities (2,098) (2,310) (1,950) (1,918) Deferred tax expected to be recovered within 12 months In £s million 2009 2008 Deferred tax assets 207 127 Deferred tax liabilities (1) (8) 206 119

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

17 Deferred Tax Assets and Liabilities continued

Deferred tax assets Fixed and Other intangible Retirement Fair value temporary In £s million assets benefits losses differences Total At 1 October 2008 (67) 69 – 390 392 Credited/(charged) to income statement 33 6 – (39) – Credited/(charged) to equity – 30 – – 30 Exchange movements (5) – – 2 (3) Other movements – – – (11) (11) Transfers (18) (26) – (216) (260) At 30 September 2009 (57) 79 – 126 148

Fixed and Other intangible Retirement Fair value temporary In £s million assets benefits losses differences Total At 1 October 2007 (23) 43 – 32 52 Credited/(charged) to income statement (4) (26) – 240 210 Credited to equity – 6 – – 6 Acquisitions (41) 46 – 98 103 Exchange movements (6) – – 24 18 Transfers 7 – – (4) 3 At 30 September 2008 (67) 69 – 390 392 Deferred tax liabilities Fixed and Other intangible Retirement Fair value temporary In £s million assets benefits gains differences Total At 1 October 2008 (2,279) (123) 6 86 (2,310) Credited to income statement 69 – – 70 139 Credited to equity – 143 – (3) 140 Exchange movements (331) – – 8 (323) Other movements – – – (4) (4) Transfers (115) 26 – 349 260 At 30 September 2009 (2,656) 46 6 506 (2,098)

Fixed and Other intangible Retirement Fair value temporary In £s million assets benefits gains differences Total At 1 October 2007 (51) (169) 7 5 (208) Credited/(charged) to income statement (36) (4) (1) 12 (29) Credited/(charged) to equity – 51 – (6) 45 Acquisitions (2,067) – – 96 (1,971) Exchange movements (150) – – 6 (144) Transfers 25 (1) – (27) (3) At 30 September 2008 (2,279) (123) 6 86 (2,310) Within other temporary differences, deferred tax assets of £180 million (2008: £12 million) are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Deferred tax assets of £20 million (2008: £14 million) have not been recognised due to the potential uncertainty of the utilisation of the underlying tax losses in certain jurisdictions. Of these unrecognised deferred tax assets, £11 million (2008: £9 million) will expire within five years. Also within other temporary differences, deferred tax assets of £77 million (2008: £54 million) are recognised for tax credits carried forward to the extent that the realisation of the related tax benefit through future taxable profits are probable. The aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised is £8 billion (2008: £6 billion). A provision of £9 million (2008: nil) has been made for taxation expected to arise on a planned future dividend payment of £125 million from one subsidiary. No other liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences, and it is probable that the differences will not reverse in the foreseeable future.

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18 Retirement Benefit Schemes The Group operates a number of retirement benefit schemes for its employees, including both defined benefit and defined contribution schemes. The Group’s two principal schemes are final salary defined benefit schemes and are operated by Imperial Tobacco Limited in the UK and Reemtsma Cigarettenfabriken GmbH in Germany. The UK scheme’s assets are held in trustee administered funds while the German scheme is unfunded. The results of the most recent actuarial valuations for the principal Group schemes (outside Germany) have been updated to 30 September 2009 by Watson Wyatt Limited, actuaries and consultants, in order to determine the amounts to be included in the balance sheet and income statement. Actuarial valuations of the pension liabilities of Reemtsma Cigarettenfabriken GmbH pension schemes were undertaken by Russ, Dr Zimmerman und Partner at 30 September 2009. Amounts recognised in the income statement In £s million 2009 2008 Current service cost 33 39 Past service cost – 1 Losses from special termination benefits 28 1 Curtailment gains (7) – Defined benefit costs in profit from operations 54 41 Interest on retirement benefit liabilities 200 179 Expected return on retirement benefit assets (182) (224) Retirement benefits net financing cost in finance costs (note 5) 18 (45) Total defined benefit scheme cost 72 (4) Defined contribution costs in profit from operations 19 15 Total retirement benefit scheme costs in the income statement 91 11 Pensions costs charged to profit from operations In £s million 2009 2008 Defined benefit costs in profit from operations 54 41 Defined contribution costs in profit from operations 19 15 Total pension costs in profit from operations 73 56 Which is split as follows in the income statement: Cost of sales 25 29 Distribution, advertising and selling costs 15 14 Administrative and other expenses 33 13 Total pension costs in profit from operations 73 56 Defined benefit schemes – amounts recognised in the balance sheet In £s million 2009 2008 Present value of funded obligations (2,845) (2,332) Fair value of scheme assets 2,798 2,769 (47) 437 Present value of unfunded obligations (747) (542) (794) (105) Recognised in the balance sheet as: In £s million 2009 2008 Retirement benefit assets 17 441 Retirement benefit liabilities (811) (546) (794) (105)

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

18 Retirement Benefit Schemes continued Defined benefit schemes obligations – changes in present value In £s million 2009 2008 Defined benefit obligation at 1 October 2,874 3,033 Current service cost 33 39 Past service cost – 1 Special termination benefits 28 1 Curtailment gains (7) – Interest cost 200 179 Actuarial losses/(gains) 524 (477) Contributions by employees 2 2 Exchange movements 141 83 Benefits paid (203) (185) Acquisitions – 198 At 30 September 3,592 2,874 Defined benefit schemes assets – changes in fair value In £s million 2009 2008 At 1 October 2,769 3,238 Expected return 182 224 Actuarial losses (58) (633) Contributions by employees 2 2 Contributions by employer 53 42 Exchange movements 53 31 Benefits paid (203) (185) Acquisitions – 50 At 30 September 2,798 2,769 The actual return on defined benefit scheme assets was a gain of £124 million (2008: loss £409 million). Amounts recognised in the statement of recognised income and expense In £s million 2009 2008 Net actuarial losses recognised in statement of recognised income and expense (582) (156) Cumulative net actuarial (losses)/gains recognised in statement of recognised income and expense since 1 October 2004 (335) 247 Defined benefit schemes – principal actuarial assumptions used in scheme valuations 2009 UK Germany Other1 Discount rate 5.50% 5.30% 5.26% Expected return on scheme assets 6.88% n/a 6.00% Future salary increases 4.50% 3.10% 3.73% Future pension increases 3.00% 2.00% 2.37% Inflation 3.00% 2.00% 2.28%

2008 UK Germany Other1 Discount rate 7.30% 6.40% 6.44% Expected return on scheme assets 6.84% n/a 6.38% Future salary increases 4.90% 3.25% 3.94% Future pension increases 3.40% 2.15% 2.44% Inflation 3.40% 2.15% 2.40%

1 Values shown are the weighted averages of the rates used in the calculations for schemes outside the UK and Germany. Assumptions regarding future mortality experience are set based on advice that uses published statistics and experience in each territory, and are provided in the table below for the defined benefit schemes in the UK and Germany, which in aggregate represent 83 per cent (2008: 85 per cent) of the Group’s total defined benefit scheme obligations at the year end. The average life expectancy, in years, of a pensioner retiring at age 65 is as follows:

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UK Germany 2009 Male Female Male Female Life expectancy at age 65 (years): Member currently aged 65 19.7 21.5 18.1 22.3 Member currently aged 50 20.7 22.3 20.2 24.2

UK Germany 2008 Male Female Male Female Life expectancy at age 65 (years): Member currently aged 65 19.6 21.4 18.0 22.0 Member currently aged 50 20.6 22.3 20.0 24.0 Categories of scheme assets and their expected rates of return UK Other Expected Percentage Expected Percentage 2009 return per of total UK return per of total other In £s million unless otherwise indicated annum Fair value assets annum Fair value assets Equities 8.2% 1,424 58.0% 7.6% 137 40.5% Bonds 4.5% 810 33.0% 5.0% 166 49.1% Property 7.3% 221 9.0% 6.0% 16 4.8% Other – – – 3.9% 24 5.6% 2,455 100.0% 343 100.0%

UK Other Expected Percentage Expected Percentage 2008 return per of total UK return per of total other In £s million unless otherwise indicated annum Fair value assets annum Fair value assets Equities 8.2% 1,211 49.0% 7.5% 131 44.0% Bonds 5.2% 988 40.0% 5.5% 132 44.3% Property 6.8% 272 11.0% 6.0% 18 6.0% Other 4.7% – – 4.4% 17 5.7% 2,471 100.0% 298 100.0% The derivation of the overall expected return on assets reflects the actual asset allocation at the measurement date combined with an expected return for each asset class. The bond return is based on current market yields. The corporate bond yield has been reduced to allow for an element of default risk. The return on equities and property is based on a number of factors including the income yield at the measurement date, the long-term growth prospects for the economy in general, the long-term relationship between each asset class and bond returns, and the movement in market indices since the previous measurement date. Excluding any self-investment through pooled fund holdings, the Imperial Tobacco Pension Fund has no investments (2008: nil) in Imperial Tobacco Group PLC’s own financial instruments. History of the plans for current and prior years In £s million 2009 2008 2007 2006 2005 At 30 September Present value of defined benefit obligations 3,592 2,874 3,033 3,072 3,007 Fair value of total plan assets 2,798 2,769 3,238 3,035 2,828 Net total surplus/(deficit) on plans (794) (105) 205 (37) (179) Experience gain/(loss) on total plan liabilities 8 (18) (19) – (9) Experience gain/(loss) on total plan assets (58) (633) 121 144 333 The main UK Group scheme is the Imperial Tobacco Pension Fund (the ITPF). An actuarial valuation of the ITPF (the triennial valuation for funding purposes) was made at 31 March 2007 by Watson Wyatt Limited. The assumptions which had the most significant effect when valuing the ITPF’s liabilities were those relating to the rate of investment return on the ITPF’s existing assets, the rates of increase in pay and pensions and estimated mortality rates. On the basis that the ITPF is continuing, it was assumed that the future investment returns relative to market values at the valuation date would be 5.20 per cent per annum and that pay and pension increases would average 4.5 per cent and 3.0 per cent respectively. The assets were brought into account at their market value. At 31 March 2007 the market value of the invested assets of the ITPF was £2,951 million. The total assets were sufficient to cover 114 per cent of the benefits that had accrued to members for past service, after allowing for expected future pay increases. The total assets were sufficient to cover 102 per cent of the total benefits that had accrued to members for past service and future service benefits for current members. As there was no actuarial deficiency, it was agreed with the trustees that, with effect from 31 March 2007, no employer contributions are required. The financial position of the ITPF and the level of contributions to be paid will be reviewed at the next triennial valuation, which is expected to be completed by the end of 2010 and will consider the scheme as at 31 March 2010.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

19 Provisions In £s million Restructuring Other Total At 1 October 2008 557 401 958 Additional provisions charged to the income statement 95 37 132 Unwind of discount on redundancy and social plan liabilities 14 – 14 Amounts used (110) (33) (143) Unused amounts reversed (23) (11) (34) Exchange movements 81 60 141 At 30 September 2009 614 454 1,068 Analysed as: In £s million 2009 2008 Current 292 187 Non-current 776 771 1,068 958 Restructuring provisions relate primarily to European Integration projects announced in June 2008 as part of the integration of Imperial Tobacco and Altadis. They affect sales and marketing, manufacturing and central support functions in a number of markets and will be implemented progressively over a period of three years. These liabilities are expected to crystallise over a number of years. Redundancy and social plan costs have been discounted at 5.0 per cent. Other provisions principally relate to commercial legal claims and disputes. The majority of other provisions represent the fair value at acquisition of current and potential Altadis commercial disputes, litigation and duty claims arising in the normal course of business. These liabilities are expected to crystallise within the next five years. 20 Share Capital In £s million 2009 2008 Authorised 56,040,000,000 ordinary shares of 10p each (2008: 56,040,000,000) 5,604 5,604 Issued and fully paid 1,067,942,881 ordinary shares of 10p each (2008: 1,067,942,881) 107 107 On 20 May 2008 the Group announced a fully underwritten 1 for 2 rights issue to part finance the Altadis acquisition. The subscription price of 1,475 pence per share represented a 30.2 per cent discount to the theoretical ex-rights price after adjusting for the interim dividend, for which new shares issued under the rights issue were not eligible. The rights issue closed on 11 June 2008, by which time valid acceptances were received in respect of 329,215,281 new shares representing 97.19 per cent of the total number of new shares offered to shareholders. The remaining 9,526,679 new shares were placed by the underwriters on 12 June 2008. The total number of new shares issued was 338,741,960. Proceeds of the rights issue, after costs of £93 million, were £4,903 million.

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21 Share Schemes The Group recognised total expenses of £21 million (2008: £18 million) related to share-based payment transactions during the year (note 4). The Group operates a number of share-based employee benefit plans. International Sharesave Plan Under the International Sharesave Plan the Board may offer options to purchase ordinary shares in the Company to employees who enter into a savings contract. The price at which options may be offered varies depending on local laws, but will not be less than 80 per cent of the mid-market price of an Imperial Tobacco Group PLC ordinary share on the London Stock Exchange on the day prior to invitation. The options may normally be exercised during the six months after expiry of the savings contract, three years after entering the Plan. The majority of awards under the International Sharesave Plan are equity-settled. Under the UK Sharesave Plan, which is part of the International Sharesave Plan, the Board may offer options to purchase ordinary shares in the Company to UK employees who enter into an HM Revenue and Customs approved Save as You Earn (SAYE) savings contract. The options may normally be exercised during the six months after the expiry of the SAYE contract, either three or five years after entering the UK Sharesave Plan. The UK Sharesave Plan is equity-settled. Long Term Incentive Plan (LTIP) Each year since demerger in 1996, annual conditional awards specified as a percentage of base salary have been made under the LTIP to Executive Directors and senior executives. The conditional awards, which vest three years after grant, are subject to the satisfaction of specified performance criteria, measured over a three year performance period. All conditional awards are at the discretion of the Remuneration Committee, with no employee having the right to receive such a conditional award. Further information relating to the performance criteria and the terms of the LTIP are set out in the Directors’ Remuneration Report. In respect of the November 2005 – November 2008 award, 93.9 per cent of the EPS related element, 77.6 per cent of the TSR related element linked to the FTSE 100 ranking, and nil per cent of the TSR element linked to the tobacco and alcohol companies comparator group, vested on 25 November 2008. Overall 66.3 per cent of the award vested on that date. In respect of the November 2006 – November 2009 award, 100 per cent of the EPS related element, 100 per cent of the TSR related element linked to the FTSE 100 ranking, and 76.7 per cent of the TSR element linked to the tobacco and alcohol companies comparator group, vested on 1 November 2009. Overall 94.2 per cent of the award vested on that date. The majority of the awards under the LTIP are equity-settled. Share Matching Scheme The Share Matching Scheme is designed to encourage eligible employees to acquire and retain Imperial Tobacco Group PLC ordinary shares. All of the awards under the Share Matching Scheme are equity-settled. Executive Directors and most of the Group’s management may elect to invest any proportion of their gross bonus (capped at 100 per cent of base salary for the Chief Executive and the Finance Director and 75 per cent for the other Executive Directors) in Imperial Tobacco Group PLC ordinary shares to be held by the Employee Benefit Trusts. For the financial year ending 30 September 2010 the cap will be 100 per cent of base salary for the Chief Executive, Finance Director and Chief Operating Officer and 85 per cent for the Group Sales and Marketing Director. Provided the shares are left in the Trusts for three years, and the individual remains in employment within the Group, the participant will retain the original shares and receive additional shares on a 1:1 ratio. The matching of the Executive Directors’ shares is subject to a performance criterion as set out in the Directors’ Remuneration Report. Employee Share Ownership Trusts The Imperial Tobacco Group PLC Employee and Executive Benefit Trust and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the Trusts) have been established to acquire ordinary shares in the Company to satisfy rights to shares arising on the exercise of Sharesave and LTIP options and on the vesting of the Share Matching Schemes. At 30 September 2009, the Trusts held 3.5 million (2008: 4.9 million) ordinary shares with a nominal value of £350,904. These comprise 3.3 million shares (2008: 4.9 million) acquired in the open market at a cost of £64.3 million (2008: £93.9 million) and 0.2 million treasury shares (2008: nil) gifted to the Trust by the Group. The acquisition of shares by the Trusts has been financed by a gift of £19.2 million and an interest free loan of £169.5 million. None of the Trusts’ shares has been allocated to employees or Executive Directors as at 30 September 2009. All finance costs and administration expenses connected with the Trusts are charged to the income statement as they accrue. The Trusts have waived their rights to dividends and the shares held by the Trusts are excluded from the calculation of basic earnings per share. Cash-settled plan liabilities As noted above certain awards are cash-settled. The total liability recognised in the balance sheet as at 30 September 2009 in respect of cash-settled awards was £0.6 million (2008: £0.6 million).

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

21 Share Schemes continued

Year from 1 October 2008 to 30 September 2009 Outstanding Outstanding Exercisable Lapsed/ Outstanding Exercisable at 1 October at start of at start of Exercised in cancelled in at end of at end of Date of grant Granted 2007 year year year year year year Sharesave options UK 31 May 2002 943,890 16,794 –––––– 4 June 2003 735,332 176,473 30,133 30,133 (30,133) ––– 26 May 2004 487,824 140,142 119,072 – (106,890) (1,075) 11,107 11,107 23 May 2005 454,966 353,638 151,480 22,880 (26,780) (1,929) 122,771 – 22 May 2006 370,989 327,777 310,138 – (188,144) (3,791) 118,203 20,503 29 May 2007 337,134 335,658 313,652 – (4,291) (59,514) 249,847 – 13 June 2008 229,294 – 227,901 – (847) (142,680) 84,374 – 9 June 2009 507,915 – –––(2,894) 505,021 – International 26 May – 4 June 2004 187,104 14,270 –––––– 23 May – 1 June 2005 197,115 171,028 33,205 33,205 (33,205) ––– 22 May – 1 June 2006 347,332 323,593 302,135 – (226,336) (18,768) 57,031 57,031 29 May – 8 June 2007 309,381 307,820 292,614 – (2,024) (43,229) 247,361 – 13 June – 24 June 2008 381,983 – 378,214 ––(140,233) 237,981 – 9 June 2009 643,613 – –––(5,606) 638,007 – US2 1 June 2005 6,573 3,265 3,058 3,058 (2,474) (584) –– 1 June 2006 4,872 4,872 4,846 – (3,078) (1,768) –– 8 June 2007 46,943 46,943 46,676 ––(3,024) 43,652 – 24 June 2008 66,310 – 64,440 ––(35,550) 28,890 – 6,258,570 2,222,273 2,277,564 89,276 (624,202) (460,645) 2,344,245 88,641

Conditional awards Share Matching Scheme 29 January 2005 942,881 771,966 –––––– 15 February 2006 901,896 834,037 765,325 – (758,375) (6,950) –– 15 February 2007 737,454 727,125 674,193 – (18,216) (12,912) 643,065 – 15 February 2008 952,865 – 947,223 – (10,982) (35,169) 901,072 – 15 February 2009 1,095,203 – ––(1,143) (13,334) 1,080,726 – 4,630,299 2,333,128 2,386,741 – (788,716) (68,365) 2,624,863 –

Long Term Incentive Plan 9 November 2004 409,560 338,192 –––––– 2 November 2005 449,403 435,484 373,318 – (246,285) (125,757) 1,276 – 1 November 2006 407,809 404,478 351,871 – (3,659) (5,694) 342,518 – 31 October 2007 316,649 – 316,649 – (1,796) (6,271) 308,582 – 26 November 2008 639,054 – ––(354) (22,671) 616,029 – 2,222,475 1,178,154 1,041,838 – (252,094) (160,393) 1,268,405 – Total options/awards 13,111,344 5,733,555 5,706,143 89,276 (1,665,012) (689,403) 6,237,513 88,641

2 For US sharesave schemes up to and including 2008 – granted as American Depositary Shares, each representing two ordinary shares and denominated in US dollars. For US sharesave 2009 – granted as ordinary shares and included in the 2009 international sharesave figures.

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Year from 1 October 2007 Year from 1 October 2008 to 30 September 20081 to 30 September 20091 Share price Share price Exercise at date of at date of price of exercise for Contractual exercise for Contractual options/awards Share price shares exercised life of shares exercised life of outstanding at at grant date during the year options/awards during the year options/awards end of year (in £ unless (in £ unless outstanding at (in £ unless outstanding at (in £ unless stated stated end of year stated end of year stated Date of grant otherwise) otherwise) (months) otherwise) (months) otherwise) Sharesave options UK 31 May 2002 10.04 21.97 n/a n/a n/a n/a 4 June 2003 9.38 18.26 4 17.18 n/a n/a 26 May 2004 10.68 21.84 16 16.80 4 8.76 23 May 2005 12.85 18.25 24 17.33 16 10.19 22 May 2006 14.23 20.57 24 16.58 24 12.12 29 May 2007 18.65 19.87 38 16.78 26 14.96 13 June 2008 20.05 n/a 48 16.11 35 17.50 9 June 2009 16.05 n/a n/a n/a 49 12.54 International 26 May – 4 June 2004 10.64 – 10.68 21.47 n/a n/a n/a n/a 23 May – 1 June 2005 12.85 – 13.04 17.79 4 17.15 n/a n/a 22 May – 1 June 2006 14.23 – 14.32 19.69 16 17.28 4 12.12 29 May – 8 June 2007 18.65 – 18.73 20.23 28 15.75 16 14.96 13 June – 24 June 2008 19.11 – 20.05 n/a 40 n/a 28 17.50 9 June 2009 15.93 n/a n/a n/a 40 12.55 US2 1 June 2005 $24.10 n/a 4 $18.75 n/a n/a 1 June 2006 $27.23 n/a 16 $17.23 4 $22.06 8 June 2007 $37.53 n/a 28 n/a 16 $30.39 24 June 2008 $43.87 n/a 40 n/a 28 $35.10

Conditional awards Share Matching Scheme 29 January 2005 20.70 n/a n/a n/a n/a 15 February 2006 22.21 5 16.92 n/a n/a 15 February 2007 22.20 17 16.19 5 n/a 15 February 2008 18.75 29 16.14 17 n/a 15 February 2009 n/a n/a 15.86 29 n/a

Long Term Incentive Plan 9 November 2004 20.62 n/a n/a n/a n/a 2 November 2005 21.75 1 16.83 n/a n/a 1 November 2006 21.77 13 16.75 1 n/a 31 October 2007 n/a 25 16.72 13 n/a 26 November 2008 n/a n/a 17.13 26 n/a

1 All measures in these columns are weighted averages. 2 For US sharesave schemes up to and including 2008 – granted as American Depositary Shares, each representing two ordinary shares and denominated in US dollars. For US sharesave 2009 – granted as ordinary shares and included in the 2009 international sharesave figures. The exercise price of options/awards is fixed over the life of each option/award, except as described below. Following the rights issue described in note 20, adjustments were made to the share plans. In respect of the Share Matching Scheme, the Trustees sold sufficient rights ‘nil paid’ to enable the balance of the rights to be taken up. In the case of the Sharesave and LTIP plans the number of shares under option, or subject to awards, was adjusted by the relevant bonus factor. In the case of the Sharesave Scheme the option price was also adjusted by the relevant bonus factor.

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

21 Share Schemes continued The weighted average exercise prices were: 2009 2008 Outstanding at the start of the year £14.14 £11.89 Granted during the year £12.55 £17.53 Exercised during the year £11.13 £9.18 Lapsed/cancelled during the year £16.63 £12.37 Outstanding at the end of the year £13.69 £14.14 Exercisable at the end of the year £11.70 £9.13 The weighted average fair value of options granted during the year was £4.88 (2008: £4.41). Pricing For the purposes of valuing awards to calculate the share-based payment charge, the Black-Scholes option pricing model has been used for all the share option and share matching schemes and for the LTIPs except for those granted since November 2005, where the Monte Carlo model has been used. A summary of the assumptions used in the Black-Scholes model for 2009 and 2008 is as follows: 2009 2008 Sharesave Share match Sharesave Share match Risk-free interest rate 2.2% – 3.0% 1.7% 4.1% – 5.5% 4.1% Volatility 31.0% – 36.0% 35.0% 24.0% – 26.0% 21.0% Expected lives of options granted 3 – 5 yrs + 6 mths 3 yrs 3 – 5 yrs + 6 mths 3 yrs Dividend yield 3.1% 3.1% 3.3% 3.3% Fair value £4.67 – £4.93 £16.21 £3.77 – £5.30 £19.18 Share price used to determine exercise price £15.67 – £16.13 £17.80 £21.87 – £22.24 £21.17 Exercise price £12.54 – £12.91 n/a £17.50 – £17.81 n/a Volatility is determined based on the three or five year share price history (the time period being determined by the length of the scheme). Market condition features were incorporated into the Monte Carlo model for the total shareholder return elements of the LTIP, in determining fair value at grant date. Assumptions used in this model were as follows: 2009 2008 Future Imperial Tobacco Group share price volatility 28.0% 18.0% Future Imperial Tobacco Group dividend yield 3.1% 3.3% Share price volatility of the tobacco and alcohol comparator group 18.0% – 43.0% 12.0% – 27.0% Share price volatility of the FTSE 100 comparator group 18.0% – 69.0% 11.0% – 71.0% Correlation between Imperial Tobacco and the alcohol and tobacco comparator group 35.0% 23.0% Correlation between Imperial Tobacco and the FTSE 100 comparator group 40.0% 30.0%

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22 Changes in Equity Equity attributable to equity Exchange holders Share Share Retained translation of the In £s million capital premium earnings reserve Company At 1 October 2007 73 964 58 23 1,118 Profit for the year attributable to equity holders of the Company – – 428 – 428 Actuarial losses on retirement benefits – – (156) – (156) Deferred tax relating to net actuarial losses on retirement benefits – – 57 – 57 Deferred tax on share-based payments – – (6) – (6) Current tax on share-based payments – – 1 – 1 Current tax on exchange movements – – – (88) (88) Proceeds from sale of shares held by Employee Share Ownership Trusts – – 5 – 5 Purchase of shares held by Employee Share Ownership Trusts – – (26) – (26) Costs of employees’ services compensated by share schemes – – 18 – 18 Rights issue 34 4,962 – – 4,996 Rights issue costs – (93) – – (93) Dividends paid – – (487) – (487) Other movements – – (1) – (1) Exchange movements – – – 541 541 At 30 September 2008 107 5,833 (109) 476 6,307 Profit for the year attributable to equity holders of the Company – – 663 – 663 Actuarial losses on retirement benefits – – (582) – (582) Deferred tax relating to net actuarial losses on retirement benefits – – 173 – 173 Deferred tax on share-based payments – – (3) – (3) Current tax on share-based payments – – 2 – 2 Current tax on exchange movements – – – (112) (112) Proceeds from sale of shares held by Employee Share Ownership Trusts – – 6 – 6 Costs of employees’ services compensated by share schemes – – 21 – 21 Dividends paid – – (640) – (640) Exchange movements – – – 703 703 At 30 September 2009 107 5,833 (469) 1,067 6,538 Cumulative goodwill of £2,410 million relating to acquisitions prior to 1998 was written off directly to reserves in line with the requirements of the accounting standards that were in force at the time. Treasury shares 2009 2008 Millions of Millions of In £s million unless otherwise indicated shares Cost shares Cost At 30 September 51.5 862 51.7 862 The reduction during the year in the number of shares held in treasury is due to the gift of 236,000 shares to the Employee Share Ownership Trusts referred to in note 21. Details of the Group’s share buyback programme may be found in note (vi) to the parent company accounts. Shares held by Employee Share Ownership Trusts In millions of shares 2009 2008 At 1 October 4.9 4.8 Acquired under rights issue – 0.7 Distribution of shares held by Employee Share Ownership Trusts (1.6) (1.5) Gift of treasury shares 0.2 – Purchase of shares held by Employee Share Ownership Trusts – 0.9 At 30 September 3.5 4.9

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

23 Minority Interests In £s million 2009 2008 At 1 October 49 23 Exchange movements 6 29 Acquisition of Altadis – 413 Purchase of Logista minority interest – (420) Profit for the year attributable to minority interests 14 13 Dividends (12) (9) At 30 September 57 49

24 Acquisitions 2009 On 7 October 2008 the Group paid deferred consideration of US$81 million (£46 million) to acquire the outstanding 49 per cent minority shareholdings in 800 JR Cigar and MCM Management. The holding was already 100 per cent consolidated as control was obtained in prior periods. 2008 On 25 January 2008 the Spanish Securities Exchange Commission, the Comision Nacional del Mercado de Valores (CNMV), announced that acceptances representing 95.81 per cent of Altadis, S.A.’s share capital had been received and Imperial Tobacco’s offer to purchase Altadis had become unconditional. The Group exercised the squeeze-out provision available under Spanish law on 25 January 2008 to compulsorily purchase the remaining shares at the offer price of €50 per share. The squeeze-out was completed on 21 February 2008. As a consequence the acquisition was fully consolidated from 25 January 2008 when the Group obtained control of Altadis. Through the acquisition of Altadis, the Group acquired direct control of Logista, and pursuant to its obligations under Spanish regulations, the Group made an offer for those shares in Logista not already owned by Altadis. The offer, at a price of €52.50 per share, completed on 6 May 2008, resulting in a total shareholding in Logista of 96.92 per cent. The remainder of the shares were subsequently acquired on 9 June 2008 by using the squeeze-out provision available under Spanish law. In the period from 25 January 2008 to 30 September 2008, the acquired business contributed revenue of £6,916 million and loss from operations of £153 million after charging £245 million for amortisation of acquired intangibles and after one-off charges of £118 million in relation to stock revalued to fair value at acquisition and sold during the period. If the acquisition had occurred on 1 October 2007, Group revenue would have been £23,602 million and Group profit from operations for the year would have amounted to £1,212 million, these amounts having been estimated by including Altadis’ results for the four months prior to acquisition adjusted to reflect the Group’s accounting policies and changes in depreciation and amortisation due to fair value adjustments. In May 2008, the Group acquired Lignum 2 Inc., a seller of quality discount cigarettes in the United States, for a total of £11 million cash. Its net assets had nil book and fair value, giving rise to goodwill of £11 million. During the year the Group also acquired interests in a number of small businesses. The aggregate consideration for these acquisitions amounted to £3 million. Full IFRS disclosures have not been provided for these small acquisitions as they are not considered to be significant to the Group as a whole. During 2005 the Group acquired a 43 per cent interest in Skruf Snus AB. The acquisition agreement included a commitment to acquire the remaining shares and provided the Group with immediate control of its operating and financial policies. Accordingly the acquisition was accounted for as a 100 per cent subsidiary to reflect the substance of the transaction. In June 2008 the Group acquired the remaining 57 per cent for a consideration of £39 million. This amount exceeded the £10 million contingent consideration originally booked by £29 million, which has been recorded as goodwill. No further consideration is payable to the former shareholders.

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Details of Altadis’ net assets and goodwill arising on the acquisition of Altadis and the subsequent purchase of the minority interest in Logista are as follows: Fair value In £s million Book value adjustments Fair value Intangible assets 484 6,038 6,522 Property, plant and equipment 638 373 1,011 Investments in associates 13 – 13 Inventories 1,378 81 1,459 Trade and other receivables 2,020 – 2,020 Derivative financial instruments 28 (6) 22 Cash 593 – 593 Borrowings (1,715) 40 (1,675) Trade and other payables (4,493) (23) (4,516) Current and deferred tax 152 (2,095) (1,943) Retirement benefit net liabilities (148) – (148) Provisions (210) (249) (459) Investment in Aldeasa 50 152 202 Net assets (1,210) 4,311 3,101 Minority interests (183) (230) (413) Goodwill 6,712 Consideration for the acquisition of Altadis 9,400

Minority interest in Logista at 6 May 2008 420 Additional goodwill 311 Consideration for the purchase of Logista minority 731 Total goodwill in relation to Altadis and Logista 7,023 Total consideration for Altadis and Logista 10,131 The fair value adjustments arising from the acquisition of Altadis were finalised in January 2009, with adjustments made to the previously published provisional fair values as follows. Provisions and tax liabilities were increased by £7 million and £15 million respectively and property, plant and equipment were reduced by £3 million. Goodwill on the acquisition of Altadis consequently increased by £25 million. The consolidated balance sheet at 30 September 2008 has been restated to reflect the finalisation of the fair value adjustments. The fair value adjustments represent management’s best estimates of the adjustments required to restate Altadis’ assets from book value to fair value at acquisition. The principal fair value adjustments are in respect of intangibles, which comprise cigarette and cigar trademarks and supply contracts and have been independently valued using the income method, and property, plant and equipment for which we engaged independent valuers. With the exception of premium cigar trademarks that the Directors have determined have an indefinite life, cigarette and mass market cigar trademarks are being amortised on a straight line basis over their estimated useful lives ranging from 20 to 30 years. Supply contracts are being amortised over periods ranging from 3 to 15 years. The goodwill of £7,023 million arising on the acquisition of Altadis represents a strategic premium to acquire Altadis’ leading positions in the world cigar market and the western European logistics market, the synergies expected to be realised following acquisition and the assembled sales, manufacturing and distribution workforces. The Group’s share of Aldeasa’s assets and liabilities was classified as held for sale upon acquisition and fair valued at that date at €275 million (£202 million). The investment in Aldeasa was disposed of on 14 April 2008 for cash consideration of €275 million at no profit or loss. Consideration for Altadis satisfied by: In £s million Cash 9,358 Direct costs related to the acquisition 42 Total consideration 9,400 Consideration for Logista minority satisfied by: In £s million Cash 729 Direct costs related to the acquisition 2 Total consideration 731

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

24 Acquisitions continued The purchase price for Altadis on a debt free basis was as follows: In £s million Total consideration 9,400 Borrowings at acquisition 1,675 Cash (593) Total purchase price 10,482 Cash flows relating to acquisitions In £s million Altadis Total consideration 9,400 Exchange rate movements between completion and settlement of the acquisition 33 Fees paid by Altadis 18 Cash acquired (593) 8,858 Total consideration for Logista minority 731 Other businesses acquired 53 Acquisition cash flows reflected in investing activities in consolidated cash flow statement 9,642

25 Commitments Capital commitments In £s million 2009 2008 Contracted but not provided for: Property, plant and equipment 69 51 Operating lease commitments Total future minimum lease payments under non-cancellable operating leases consist of leases where payments fall due: In £s million 2009 2008 Property Within one year 18 13 Between one and five years 69 37 Beyond five years 4 14 91 64

Plant and equipment (including fixtures and motor vehicles) Within one year 5 5 Between one and five years 11 8 16 13

26 Legal Proceedings The Group is currently involved in a number of legal cases in which claimants are seeking damages for alleged smoking and health-related effects. In the opinion of the Group’s lawyers, the Group has meritorious defences to these actions, all of which are being vigorously contested. Although it is not possible to predict the outcome of the pending litigation, the Directors believe that the pending actions will not have a material adverse effect upon the results of the operations, cash flow or financial condition of the Group. Consequently, the Group has not provided for any amounts in respect of these cases in the consolidated financial statements. In October 2003 the UK Office of Fair Trading (OFT) commenced an investigation under the Competition Act 1998 into the operation of the UK tobacco supply chain. On 24 April 2008, the OFT issued a Statement of Objections (SO) which set out the OFT’s allegations against the tobacco manufacturers Imperial Tobacco Group and Gallaher, and 11 retailers. The OFT alleges that these tobacco manufacturers and retailers variously engaged in one or more unlawful practices in relation to retail prices for some or all of a number of tobacco products in breach of Chapter 1 of the Competition Act 1998. Following the issue of the SO, the OFT invited recipients of the SO to enter into settlement discussions on a ‘without prejudice’ basis to reach ‘early resolution agreements’ with the OFT. On 11 July 2008, the OFT announced that six of the parties subject to the SO had reached early resolution agreements with the OFT, agreeing to pay a combined figure of some £132.3 million if all leniency and early resolution discounts are taken into account. Other than Imperial Tobacco Group, the parties which have also not settled with the OFT and are therefore contesting the OFT’s allegations, are the Co-operative Group, Morrisons (including Safeway), Shell and Tesco.

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Imperial Tobacco Group’s detailed written response to the SO was submitted to the OFT on 15 August 2008 and Imperial Tobacco’s representatives made submissions to the OFT in defence of the allegations at an oral hearing on 3 December 2008. The OFT indicated in a letter dated 12 October 2009 that it currently intends to notify the parties of its ‘final’ decision in the investigation in the first quarter of 2010. We have no indication of whether that will be an infringement decision, a file closure decision or some other form of decision. If the OFT proceeds to an infringement decision, it may impose a fine. The maximum amount of any fine, under the statutory regime we believe that the OFT may apply, is 10 per cent of a company’s UK turnover for up to three years (although the actual amount may be less). By way of example, in the three years to 30 September 2003, Imperial Tobacco Group’s aggregate net UK turnover was £2,215 million. The applicable turnover on which the amount of a fine is based expressly excludes VAT and other taxes directly related to turnover, which Imperial Tobacco Group has been advised would also exclude duty. In addition, if the OFT were to make an infringement finding, it could issue orders prohibiting that activity in the future, whilst the infringing company might face the prospect of damages actions from third parties. If the OFT were to make an infringement decision, Imperial Tobacco Group would be able to appeal the OFT’s decision to the Competition Appeal Tribunal, and ultimately, on a point of law to the Court of Appeal. We take compliance with competition law very seriously and reject any suggestion that we have acted in any way contrary to the interests of consumers. Consequently, the Group has not provided for any amount in the consolidated financial statements. 27 Cash Flows from Operating Activities In £s million 2009 2008 Profit for the year 677 441 Adjustments for: Taxation 268 180 Finance costs 2,572 1,393 Investment income (1,180) (543) Share of post-tax profits of associates (1) (2) Depreciation, amortisation and impairment 635 457 Profit on disposal of property, plant and equipment (1) (1) Profit on the divestment of brands – (174) Post-employment benefits 1 6 Costs of employees’ services compensated by share schemes 21 18 Movement in provisions (45) 388 Operating cash flows before movements in working capital 2,947 2,163

Decrease/(increase) in inventories 288 (44) Decrease in trade and other receivables 202 21 Increase/(decrease) in trade and other payables 495 (39) Movement in working capital 985 (62) Taxation paid (363) (401) Net cash flows from operating activities 3,569 1,700

28 Analysis of Net Debt The movements in cash and cash equivalents, borrowings, derivative financial instruments and finance lease liabilities in the year were as follows: Cash Derivative Finance and cash Current Non-current financial lease In £s million equivalents borrowings borrowings instruments liabilities Total At 1 October 2008 642 (2,678) (9,558) (67) (26) (11,687) Reallocate non-current to current – (3,504) 3,504 – – – Cash flow 334 4,254 (2,536) 130 2 2,184 Accretion of interest – 25 (169) 11 – (133) Change in fair values – – – (1,059) – (1,059) Exchange movements 60 (657) (748) – (4) (1,349) At 30 September 2009 1,036 (2,560) (9,507) (985) (28) (12,044)

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FINANCIAL STATEMENTS Notes to the Financial Statements continued

28 Analysis of Net Debt continued Adjusted net debt Management monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals, the fair value of derivative financial instruments providing commercial cash flow hedges and finance lease liabilities. In £s million 2009 2008 Reported net debt (12,044) (11,687) Accrued interest 291 158 Fair value of derivatives providing commercial cash flow hedges 890 (40) Finance lease liabilities 28 26 Adjusted net debt (10,835) (11,543)

29 Reconciliation of Cash Flow to Movement in Net Debt In £s million 2009 2008 Increase in cash and cash equivalents 334 146 Settlement of exchange rate derivative financial instruments 5 (13) Collateralisation deposits 125 188 Increase in borrowings (4,324) (13,815) Repayment of borrowings 6,042 9,646 Repayment of finance leases 2 1 Change in net debt resulting from cash flows 2,184 (3,847) Exchange movements (1,349) (1,134) Borrowings acquired with subsidiaries – (1,645) Derivative financial instruments acquired with subsidiaries – 22 Finance leases acquired with subsidiaries – (25) Other non-cash movements including revaluation of derivative financial instruments (1,192) (170) Movement in net debt during the year (357) (6,799) Opening net debt (11,687) (4,888) Closing net debt (12,044) (11,687)

30 Balances and Transactions with Associates and Joint Ventures Assets Liabilities Goods and services 2009 Accounts Current Accounts In £s million receivable loans payable Purchases Sales Associates 6 – (4) 19 13 Joint ventures 9 16 (3) 44 44 15 16 (7) 63 57

Assets Liabilities Goods and services 2008 Accounts Current Accounts In £s million receivable loans payable Purchases Sales Associates 5 – (9) 18 12 Joint ventures 4 17 – 18 1 9 17 (9) 36 13

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Independent Auditors’ Report to the Members of Imperial Tobacco Group PLC

We have audited the parent company financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2009 which comprise the Balance Sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Respective Responsibilities of Directors and Auditors As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Sections 495 to 497 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. Opinion on Financial Statements In our opinion the parent company financial statements: – give a true and fair view of the state of the Company’s affairs as at 30 September 2009; – have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and – have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on Other Matters Prescribed by the Companies Act 2006 In our opinion – the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and – the information given in the Report of the Directors for the financial year for which the parent company financial statements are prepared is consistent with the parent company financial statements. Matters on Which We Are Required to Report by Exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. Other Matter We have reported separately on the Group financial statements of Imperial Tobacco Group PLC for the year ended 30 September 2009.

David Charles (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Bristol 10 November 2009

IMPERIAL TOBACCO GROUP PLC 2009 127 FINANCIAL STATEMENTS Imperial Tobacco Group PLC Balance Sheet at 30 September 2009

30 September 30 September In £s million Notes 2009 2008 Fixed assets Investments in subsidiaries (ii) 1,035 1,035

Current assets Debtors (iii) 6,015 5,637

Creditors: amounts falling due within one year (iv) (208) (16) Net current assets 5,807 5,621 Total assets less current liabilities 6,842 6,656 Net assets 6,842 6,656

Capital and reserves Called up share capital (v) 107 107 Share premium account (vi) 5,833 5,833 Profit and loss account (vi) 902 716 Equity shareholders’ funds 6,842 6,656 The financial statements on pages 128 to 130 were approved by the Board of Directors on 10 November 2009 and signed on its behalf by:

Iain Napier Robert Dyrbus Chairman Director

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Notes to the Imperial Tobacco Group PLC Balance Sheet

Basis of Preparation The financial statements have been prepared on the going concern basis in accordance with the historical cost convention, the Companies Act 2006 and UK Generally Accepted Accounting Principles. As permitted by section 408 of the Companies Act 2006, no separate profit and loss account has been presented for the Company. The Company has not presented a cash flow statement or provided details of related party transactions as permitted under FRS 1 (revised) “Cash flow statements” and FRS 8 “Related party disclosures” respectively. As permitted by FRS 29, the Company has elected not to present FRS 29 “Financial instruments: disclosures” in the notes to its individual financial statements as full equivalent disclosures are presented in the consolidated financial statements. The principal accounting policies are set out below. Investments Held as Fixed Assets Investments held as fixed assets comprise the Company’s investment in subsidiaries and are shown at cost less any provision for impairment. Dividends Final dividends are recognised as a liability in the Company’s financial statements in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid. Financial Instruments Non-derivative financial assets are classified as debtors (including cash). Debtors are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method, subject to reduction for allowances for estimated irrecoverable amounts. A provision for impairment of receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of those receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, and is recognised in the profit and loss account. For interest-bearing assets, the carrying value includes accrued interest receivable. (i) Dividends Amounts recognised as distributions to ordinary shareholders in the year: In £s million 2009 2008 Final dividend for the year ended 30 September 2008 of 42.2p per share (2007: 42.2p) 427 326 Interim dividend for the year ended 30 September 2009 of 21.0p per share (2008: 20.9p) 213 161 640 487 A final dividend for the year ended 30 September 2009 of 52.0 pence per share has been proposed. This amounts to £527 million based on the number of shares ranking for dividend at 30 September 2009. At the year end, the shareholders had not yet approved the final dividend and therefore it is not included in the balance sheet as a liability. The dividend per share figures included in the table above reflect the bonus element of the rights issue as described in note 20 of the consolidated financial statements. (ii) Investments Held as Fixed Assets In £s million 2009 2008 Cost of shares in Imperial Tobacco Holdings (2007) Limited 1,035 1,035 A list of the principal subsidiaries of the Company is shown on pages 131 and 132. (iii) Debtors: Amounts Falling Due Within One Year In £s million 2009 2008 Amounts owed by Group undertakings 6,015 5,633 Other debtors and prepayments – 4 6,015 5,637 Amounts owed by Group undertakings are unsecured, have no fixed date for repayment and are repayable on demand. (iv) Creditors: Amounts Falling Due Within One Year In £s million 2009 2008 Bank overdrafts 208 16 (v) Called Up Share Capital In £s million 2009 2008 Authorised 56,040,000,000 ordinary shares of 10p each (2008: 56,040,000,000) 5,604 5,604 Issued and fully paid 1,067,942,881 ordinary shares of 10p each (2008: 1,067,942,881) 107 107 On 20 May 2008 the Group announced a fully underwritten 1 for 2 rights issue to part finance the Altadis acquisition. The subscription price of 1,475 pence per share represented a 30.2 per cent discount to the theoretical ex-rights price after adjusting for the interim dividend, for which new shares issued under the rights issue were not eligible. The rights issue closed on 11 June 2008, by which time valid acceptances were received in respect of 329,215,281 new shares representing 97.19 per cent of the total number of new shares offered to shareholders. The remaining 9,526,679 new shares were placed by the underwriters on 12 June 2008. The total number of new shares issued was 338,741,960. Proceeds of the rights issue, after costs of £93 million, were £4,903 million.

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FINANCIAL STATEMENTS Notes to the Imperial Tobacco Group PLC Balance Sheet continued

(vi) Reserves Share Profit premium and loss In £s million account account At 1 October 2008 5,833 716 Profit for the year – 826 Dividends – (640) At 30 September 2009 5,833 902 Profit for the year As permitted by section 408(3) of the Companies Act 2006, the profit and loss account of the Company is not presented. The profit attributable to shareholders, dealt with in the financial statements of the Company, is £826 million (2008: £601 million). Purchase of treasury shares In 2009 and 2008 the Company did not buy back any ordinary Imperial Tobacco shares following the suspension of the programme on 8 February 2007. The total number of shares held in treasury is 51,481,000 (2008: 51,717,000) representing 4.8 per cent (2008: 4.8 per cent) of the issued share capital. The total cost, including expenses, of shares held in treasury is £862 million (2008: £862 million). The shares purchased to date have not been cancelled but are held in a treasury shares reserve and represent a deduction from equity shareholders’ funds (see note 22 to the Consolidated Financial Statements). The reduction during the year in the number of shares held in treasury is due to a gift of 236,000 shares to the Employee Share Ownership Trusts. (vii) Reconciliation of Movements in Shareholders’ Funds In £s million 2009 2008 Profit for the year 826 601 Dividends (640) (487) Rights issue – 4,996 Rights issue costs – (93) Movement in equity shareholders’ funds 186 5,017 Opening equity shareholders’ funds 6,656 1,639 Closing equity shareholders’ funds 6,842 6,656 (viii) Contingent Liabilities Imperial Tobacco Group PLC has guaranteed various borrowings and liabilities of certain UK and overseas subsidiary undertakings, including various Dutch and Irish subsidiaries. At 30 September 2009, the contingent liability totalled £11,464 million (2008: £11,161 million). The guarantees include the Dutch subsidiaries which, in accordance with Book 2, Article 403 of The Netherlands Civil Code, do not file separate financial statements with the Chamber of Commerce. Under the same article, Imperial Tobacco Group PLC has issued declarations to assume any and all liabilities for any and all debts of the Dutch subsidiaries. The guarantees also cover the Irish subsidiaries, all of which are included in the consolidated financial statements as at 30 September 2009. The Irish companies, namely John Player & Sons Limited, John Player Distributors Limited and Imperial Tobacco Mullingar have therefore availed themselves of the exemption provided by section 17 of the Irish Companies (Amendment) Act 1986 in respect of documents required to be attached to the annual returns for such companies. The Directors have assessed the fair value of the above guarantees and do not consider them to be material. They have therefore not been recognised on the balance sheet. (ix) Other Information Number of employees The average number of employees during 2009 was nil (2008: nil). Directors’ emoluments Details of Directors’ emoluments and interests are provided within the Directors’ Remuneration Report on pages 55 to 70. These disclosures form part of the financial statements.

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Principal Subsidiaries

The principal subsidiaries and joint ventures of the Group, which are unlisted unless otherwise indicated, are shown below. Registered in England and Wales, wholly owned Name Principal activity Imperial Tobacco Holdings (2007) Limited Holding investments in subsidiary companies Imperial Tobacco Limited Manufacture, marketing and sale of tobacco products in the UK Imperial Tobacco International Limited Export and marketing of tobacco products Imperial Tobacco Finance PLC Finance company Incorporated overseas, wholly owned Name and country of incorporation Principal activity Altadis S.A., Spain Manufacture, marketing, sale and distribution of tobacco products in Spain Altadis Distribution France S.A.S., France Distribution of tobacco products in France Altadis Emisiones Financieras SAU, Spain Finance company Altadis Finance B.V., the Netherlands Finance company Altadis Maroc, S.A., Morocco Manufacture, marketing, sale and distribution of tobacco products in Morocco Altadis Middle East Fzco., United Arab Emirates Marketing and sale of tobacco products in the Middle East Altadis USA Inc.1, United States of America Manufacture, marketing and sale of cigars in the United States of America Commonwealth Brands Inc., United States of America Manufacture, marketing and sale of tobacco products in the United States of America Compañía de Distribución Integral Logista, S.A., Spain Distribution of tobacco products and related services in Spain Dunkerquoise des Blends S.A.S., France Tobacco processing in France Ets. L. Lacroix Fils N.V., Belgium Manufacture, marketing and sale of tobacco products in Belgium Imperial Tobacco Australia Limited, Australia Marketing and sale of tobacco products in Australia Imperial Tobacco CR s.r.o., Czech Republic Marketing and sale of tobacco products in the Czech Republic Imperial Tobacco Finland Oy, Finland Marketing and sale of tobacco products in Finland Imperial Tobacco Hellas S.A., Greece Marketing and sale of tobacco products in Greece Imperial Tobacco Italia Srl.1, Italy Marketing and sale of tobacco products in Italy Imperial Tobacco Magyarorszäg Marketing and sale of tobacco products in Hungary Dohänyforgalmazö Kft, Hungary Imperial Tobacco Mullingar, Republic of Ireland Manufacture of fine cut tobacco in the Republic of Ireland Imperial Tobacco New Zealand Limited, New Zealand Manufacture, marketing and sale of tobacco products in New Zealand Imperial Tobacco Norway A.S., Norway Marketing and sale of tobacco products in Norway Imperial Tobacco Polska S.A., Poland Manufacture, marketing and sale of tobacco products in Poland Imperial Tobacco Sales & Marketing LLC, Russia Marketing and sale of tobacco products in Russia Imperial Tobacco Sigara ve Tutunculuck Marketing and sale of tobacco products in Turkey Sanayi ve Ticaret A.S., Turkey Imperial Tobacco Slovakia A.S., Slovak Republic Manufacture, marketing and sale of tobacco products in the Slovak Republic Imperial Tobacco Taiwan Co. Limited, Taiwan Marketing and sale of tobacco products in Taiwan Imperial Tobacco Taiwan Manufacturing Manufacture of tobacco products in Taiwan Company Limited, Taiwan Imperial Tobacco Tutun Urunleri Satis ve Manufacture of tobacco products in Turkey Pazarlama A.S., Turkey Imperial Tobacco Ukraine, Ukraine Marketing and sale of tobacco products in Ukraine John Player S.A., Spain Marketing and sale of tobacco products in the Canary Islands John Player & Sons Limited, Republic of Ireland Marketing and sale of tobacco products in the Republic of Ireland Logista Italia S.p.A., Italy Distribution of tobacco products in Italy Reemtsma Cigarettenfabriken GmbH, Germany Manufacture, marketing and sale of tobacco products in Germany Reemtsma International Asia Services Limited, China Marketing of tobacco products in China OOO Reemtsma Volga Tabakfabrik, Russia Manufacture of tobacco products in Russia Skruf Snus AB, Sweden Manufacture, marketing and sale of tobacco products in Sweden Société Nationale d’Exploitation Industrielle des Manufacture, marketing and sale of tobacco products in France and Tabacs et des Allumettes S.A., France export of tobacco products Supergroup S.A.S., France Wholesale distribution in France

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SUPPLEMENTARY INFORMATION Principal Subsidiaries continued

Incorporated overseas continued Tobaccor S.A.S., France Holding investments in subsidiary companies involved in the manufacture, marketing and sale of tobacco products in Africa Tobacna Ljubljana d.o.o, Slovenia Marketing and sale of tobacco products in Slovenia Van Nelle Canada Limited, Canada Manufacture of tubes and sale of tobacco products in Canada Van Nelle Tabak Nederland B.V., the Netherlands Manufacture, marketing and sale of tobacco products in the Netherlands 800 JR Cigar Inc., United States of America Holding investments in subsidiary companies involved in the sale of cigars in the United States of America Incorporated overseas, partly owned Name and country of incorporation Principal activity Percentage owned1 Altadis Polska, S.A., Poland Manufacture of tobacco products in Poland 99.97 ZAO Balkanskaya Zvezda, Russia Manufacture of tobacco products in Russia 99.9 Imperial Tobacco Production Ukraine, Ukraine Manufacture of cigarettes in Ukraine 99.8 Reemtsma Kyrgyzstan OJSC, Kyrgyzstan Manufacture, marketing and sale of tobacco products in Kyrgyzstan 98.6 Société Ivoirienne des Tabacs S.A.2, Ivory Coast Manufacture, marketing and sale of tobacco products in the Ivory Coast 74.1 Imperial Tobacco TKS a.d., Macedonia Manufacture, marketing and sale of tobacco products in Macedonia 99.1 Incorporated overseas, joint ventures Name and country of incorporation Principal activity Percentage owned1 Altabana S.L., Spain Holding investments in subsidiary companies involved in the marketing and sale of Cuban cigars 50.0 Corporación Habanos, S.A., Cuba Export of cigars manufactured in Cuba 50.0 In addition, the Group also wholly owns the following partnership: Name and country Principal activity Imperial Tobacco (EFKA) GmbH & Co. KG, Germany Manufacture of tubes in Germany Principal place of business: Industriestrasse 6, Postfach 1257, D-78636 Trossingen, Germany The subsidiaries listed above were held throughout the year with the exception of 800 JR Cigar Inc., the remaining 49 per cent of which was acquired in October 2008. The consolidated Group financial statements include all the subsidiary undertakings and entities shown above. With the exception of Imperial Tobacco Holdings (2007) Limited, which is wholly owned by the Company, none of the shares in the subsidiaries is held by the Company. A full list of subsidiaries is attached to the Annual Return of the Company. 1 The percentage of issued share capital held by immediate parent and the effective voting rights of the Group are the same, with the exception of Altadis USA Inc., and Imperial Tobacco Italia Srl where the entire issued share capital, and therefore 100 per cent of the voting rights, are held by a number of Group companies. 2 Listed on the Stock Exchange of the Ivory Coast.

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SUPPLEMENTARY INFORMATION Shareholder Information

Registered office PO Box 244 Upton Road Bristol BS99 7UJ +44 (0)117 963 6636 Registered in England and Wales No: 3236483 Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA 0871 384 2037* +44 (0)121 415 7009 0871 384 2255* text phone for shareholders with hearing difficulties * calls to this number will be charged at 8p per minute from a BT landline. Mobile and other providers’ charges may vary. ADR Depositary Shareholder Services for ADR Holders Citibank Shareholder Services PO Box 43077 Providence, RI 02940-3077 USA Toll-free number in the USA:1-877-CITI-ADR (877-248-4237) email: [email protected] Stockbrokers RBS Hoare Govett Limited 250 Bishopsgate London EC2M 4AA +44 (0)20 7678 8000 Morgan Stanley & Co International Limited 20 Bank Street Canary Wharf London E14 4AD +44 (0)20 7425 8000 Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 31 Great George Street Bristol BS1 5QD Lawyers Allen & Overy LLP One Bishops Square London E1 6AD

Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA

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SUPPLEMENTARY INFORMATION Shareholder Information continued

Financial Calendar and Dividends Half year results are expected to be announced in April 2010 and the full year’s results in November 2010. The Annual General Meeting of the Company is to be held on Tuesday 2 February 2010 at the Bristol Marriott Hotel City Centre. The Notice of Meeting and explanatory notes about the resolutions to be proposed are set out in the circular enclosed with this report. Dividends are generally paid in August and February. Payment of the 2009 final dividend, if approved, will be on 19 February 2010 to shareholders on the register at the close of business on 22 January 2010. The associated ex dividend date is 20 January 2010. Shareholders who do not currently mandate their dividends and who wish to do so should complete a mandate instruction form obtainable from Equiniti, at the address shown. Share Dealing Service A low cost, execution-only share-dealing service for the purchase and sale of Imperial Tobacco Group PLC shares is available from NatWest Stockbrokers. NatWest Stockbrokers is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange and PLUS. For details, please contact NatWest Stockbrokers, Premier Place, 21/2 Devonshire Square, London EC2M 4BA, telephone: 0870 600 3070. Individual Savings Account (ISA) Investors in Imperial Tobacco Group PLC ordinary shares may take advantage of a low cost Individual Savings Account (ISA) and Investment Account where they can hold their Imperial Tobacco Group shares electronically. The ISA and Investment Account are operated by Equiniti Financial Services Limited. Commission starts from £5.00 and £1.75 respectively for the sale and purchase of shares. For a brochure or to apply for an Investment Account or ISA go online to www.shareview.co.uk/dealing or call Equiniti on 0845 300 0430. Dividend Reinvestment Plan (DRIP) Imperial Tobacco Group PLC has set up a dividend reinvestment plan (DRIP) to enable shareholders to use their cash dividend to buy further shares in the market. Further information can be obtained from Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, telephone: 0871 384 2268* or online at www.shareview.co.uk. * calls to this number will be charged at 8p per minute from a BT landline. Mobile and other providers’ charges may vary. American Depositary Receipt Facility Imperial Tobacco Group PLC ordinary shares are traded on the OTCQX International Premier platform in the form of American Depositary Shares (ADSs) using the symbol “ITYBY”. Each ADS represents two Imperial Tobacco Group PLC ordinary shares. The ADS facility is administered by Citibank, N.A. and enquiries should be directed to them at the address shown. Website Information on Imperial Tobacco Group PLC is available on our website: www.imperial-tobacco.com. Equiniti also offers a range of shareholder information online. You can access information on your holdings, indicative share prices and dividend details and find practical help on transferring shares or updating your details at www.shareview.co.uk.

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SUPPLEMENTARY INFORMATION Index

A Directors and Employees 89 Nominations Committee 43 Accounting Policies 77 Directors’ Report: Business Review 5 Notes to the Financial Statements 85 Directors’ Report: Governance 33 Acquisitions 122 O Adjusted Measures 81 Disclosure Committee 47 Operating Review 21 Africa 28 Dividend Reinvestment Plan (DRIP) 134 Altadis 3, 6, 8 Dividends 11, 50, 91 P American Depositary Donations 51 Pensions 68, 113 Receipts/Shares 133, 134 E Performance Highlights IFC Americas 27 Poland 26 Earnings Per Share 8, 92 Annual General Meeting 49, 134 Employees 52, 89 Portugal 26 Asia 28 Environmental Management 20 Principal Risks 16 Audit Committee 48 Excise Duty 16 Principal Subsidiaries 131 Auditors Productivity 31 F Remuneration 48, 88 Profit Before Taxation 88 Financial Calendar 134 Report 73, 127 Property, Plant and Equipment 95 Financial Highlights 2 Australia 28 Provisions 116 Financial Review 8 Austria 26 Financial Statements 71 R B France 26 Registrars 133 Balance Sheet (Consolidated) 75 G Regulation 7, 16 Balance Sheet (Parent) 128 Germany 24 Remuneration Committee 55 Belgium 26 Glossary 136 Remuneration Report 55 Board Committees 40 Greece 26 Rest of EU 26 Board of Directors 36 Group Performance IFC, 8 Rest of the World 28 Borrowings and Derivative Restructuring Costs 89 Financial Instruments 98 H Retirement Benefit Schemes 80, 113 Business Overview IFC Health and Safety 20 Russia 28 C I S Case Study Income Statement 74 Saudi Arabia 28 Total Tobacco Focus 18 Industry Overview 13 Segmental Information 85 Morocco 29 Intangible Assets 93 Cash and Cash Equivalents 97 Inventories 97 Share Capital 50, 116 Cash Flows from Operating Activities 125 Investments in Associates and Joint Ventures 96 Share Schemes 117 Cash Flow Statement 76 International Footprint 22 Shareholder Information 133 Chairman’s Statement 3 Ireland 26 Spain 25 Changes in Equity 121 Italy 26 Statement of Recognised Income and Expense 76 Chief Executive’s Committee 38 K Strategic Review 12 Chief Executive’s Review 6 Key Performance Indicators 14 Strategy 12 Commitments 124 L Contents 1 T Laos 28 Corporate Governance Report 39 Taiwan 28 Legal Proceedings 83, 124 Corporate Responsibility 20 Taxation 11, 90 Litigation 17, 54 Creditor Payment Policy 51 Total Shareholder Return Index 3 Logistics 32 Critical Accounting Estimates Trade and Other Payables 97 and Judgements 83 M Trade and Other Receivables 97 Czech Republic 26 Manufacturing 31 Travel Retail 25 Middle East 28 D Turkey 28 Minority Interests 122 Deferred Tax 111 Morocco 28, 29 U Directors Ukraine 28 Biographies 36 N United Kingdom 23 Interests in Shares 59 Net Debt 125 United States of America 27 Pensions 68 Net Finance Costs 90 Remuneration 55 Netherlands 26 W Responsibilities 52 New Zealand 28 World Tobacco Market 13

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SUPPLEMENTARY INFORMATION Glossary

Adjusted attributable earnings Distribution fees Market capitalisation Adjusted profit after tax attributable Distribution fees comprises the Logistics The market price of a share multiplied to the equity holders of the company. segment revenue excluding the cost by the number of shares in issue. of distributed products. Management Adjusted distribution margin considers this an important measure Market share The adjusted profit from operations in assessing the profitability of Market share represents our best estimate for the Logistics segment divided by Logistics operations. of the volumes of our brands sold as a distribution fees for the Logistics segment. percentage of total market volumes during Earnings per share – adjusted the reporting period, including the most Adjusted measures Adjusted profit after tax attributable to the appropriate independent data available. Management believes that reporting equity holders of the Company divided by We use latest monthly data only where the adjusted measures provides a useful the weighted average number of shares moving annual total would be misleading – comparison of business performance in issue during the period excluding shares for example, if market entry or a significant and reflects the way in which the business held to satisfy employee share plans and product launch has taken place part way is controlled. Accordingly, adjusted shares purchased by the Company and through the reporting period. measures of profit from operations, net held as Treasury shares. finance costs, profit before tax, taxation, Make your own (MYO) attributable earnings and earnings Earnings per share – basic Tobacco which is made into a cigarette per share exclude, where applicable, Profit after tax attributable to equity holders using a tube machine and filter tubes. amortisation of acquired intangibles, of the Company divided by the weighted restructuring costs, retirement benefits average number of shares in issue during Net revenue net financing income, fair value gains and the period excluding shares held to Net revenue comprises the Tobacco losses on derivative financial instruments satisfy employee share plans and shares segment revenue less duty and similar in respect of commercially effective purchased by the Company and items. Management considers this an hedges, one-off acquisition accounting held as Treasury shares. important measure in assessing the adjustments, brand divestment gains profitability of Tobacco operations. and related taxation effects. The adjusted Earnings per share – diluted measures in this report are not defined As for basic earnings per share except that Other tobacco products (OTP) terms under International Financial the weighted average number of shares Tobacco products other than cigarettes Reporting Standards and may not be includes the weighted average number of i.e. fine cut tobacco, cigars, pipe tobacco, comparable with similarly titled measures shares that would be issued on conversion snuff and snus. reported by other companies. of all the dilutive potential ordinary shares arising from rights under the employee Private label Adjusted net debt share plans. An exclusive retailer or distributor brand Management monitors the Group’s usually in the low-price segment. borrowing levels using adjusted net debt Effective tax rate which excludes interest accruals, the fair The tax charge in the income statement Productivity value of derivative financial instruments as a percentage of profit before taxation. Productivity is measured as factory output providing commercial cash flow hedges divided by paid hours. and finance lease liabilities. Enterprise value (EV) Market capitalisation plus net debt. Roll your own (RYO) Adjusted operating margin Tobacco which is used with rolling papers The adjusted profit from operations for Ex dividend date to hand make cigarettes. the Tobacco business divided by net The date from which shares are traded revenue for the Tobacco segment. without the right to the most recently Snus declared dividend payment. Snus is a moist oral tobacco product. Adjusted profit from operations It is manufactured and consumed primarily Profit from operations adjusted for FMC in Sweden and Norway. amortisation of acquired intangibles, Factory-made cigarettes. restructuring costs, one-off acquisition Total Shareholder Return (TSR) accounting adjustments and brand Fine cut tobacco (FCT) The total investment gain to shareholders divestment gains. Loose tobacco which is used with rolling resulting from the movement in the share papers (roll your own) or filter tubes (make price and assuming dividends are Amortisation your own). immediately reinvested in shares. A systematic charge to the income statement to write off the value of Framework Convention Travel retail intangible assets with finite lives over on Tobacco Control Products made available in a market their useful lives. The World Health Organization’s Framework principally for travelling consumers. Convention on Tobacco Control (FCTC) Attributable earnings is the global tobacco treaty that seeks Volumes Profit after tax attributable to the to regulate tobacco products. Our volume Key Performance Indicator equity holders of the company. (KPI) represents the number of units ISO sold in the period. Cash conversion rate The International Organization for Cash conversion is calculated as cash Standardization, widely known as ISO, Weighted average cost of capital flow from operations before tax payments is an international standard-setting body The weighted average of the costs of less net capital expenditure relating comprised of representatives from various various types of capital that finance a to property, plant and equipment and national standards organisations. company or a project. Capital would software as a percentage of adjusted It promulgates worldwide industrial generally include a mix of debt profit from operations. and commercial standards. and equity.

136 IMPERIAL TOBACCO GROUP PLC 2009 Business Overview

Germany £826m £403m See page 24

Imperial Tobacco Group PLC Annual Report and Accounts 2009 Registered Office Imperial Tobacco Group PLC PO Box 244 Upton Road Bristol BS99 7UJ UK www.imperial-tobacco.com